|
We
are sure you have heard the story of Rip Van Winkle who walked into
the mountains one night and meets a band of strangers. After drinking
their mysterious brew, he falls into a deep sleep for 20 years.
The
implementation of VAT has been put to sleep by Jaswant Singh and his
band of politicians by administering the political brew. For how long
is anybody's guess.
The
most nagging doubt is as to whether implementation of VAT has been put
to Rest in Peace once for all. We believe that VAT has not yet become
an academic exercise and one of the main reasons for the postponement
is electoral consideration. Other possible reasons may be the decision
of the Empowered Committee to tinker with the agreed Schedule of Goods
like reduction in rate of tax on medicines which will result in further
loss of revenue and consequent demand of compensation from the Centre.
Most
of you must now be sic of postponement of implementation of VAT. I have
also run out of appropriate title for my article, as it were, writing
on VAT postponement at frequent intervals. Considering that catchy titles
like VAT Fiasco, VAT a Mess, etc., have already been featured by newspapers
in their editorials and syndicated columns, I decided to settle for
the straight forward title "Will VAT be implemented".
With
repeated postponement of the deadline, I wondered if the title should
read as "Will VAT be implemented at all?". Based on my interactions
I feel that VAT implementation has not yet become an academic exercise
and is very much on the agenda of the Government.
It
is sad that political consideration has taken predominance in the decision
to postpone the implementation of VAT.
Besides
political considerations, a lot of other factors that contributed to
the postponement and the steps required to be taken to usher in a practical
VAT beneficial to all stake holders needs to be considered.
First
let us have a brief recap of the events leading to the deferment of
implementation of VAT
CENTRE’s
COMMITMENT TO VAT IMPLEMENTATION
The
finance Minister in his budget speech had heralded the implementation
of VAT with the following observation:
"First,
the coming year will be historic with the States switching over to
a Value Added Tax (VAT). The Central Government has been a partner
with the States, in the highest tradition of cooperative federalism,
in this path-breaking reform.
The
Conference of State Chief Ministers, presided over by the Prime Minister,
held on October 18, 2002 confirmed the final decision that all States
and Union Territories would introduce VAT from April 2003. The Empowered
Committee of State Finance Ministers, on February 8, 2003, has again
endorsed the suggestion that all State legislations on VAT should
have a minimum set of common features. Apart from avoiding cascading
of taxes, the introduction of VAT is expected to increase revenues
as the coverage expands to value addition at all stages of sale in
the production and distribution chain.
The
Government of India considers the introduction of VAT, at the State
level, to be a historic reform of our domestic trade tax system, It
will assist the States to transit successfully from the erstwhile
sales tax system to a modern domestic system, at present in use in
over 120 countries"
Mr.
Jaswant Singh had highlighted in his speech the decision of the empowered
Committee that the State VAT legislation should have a minimum set of
common feature. The commitment of the Central Government is evident
and there is no hint of distancing the Central Government from the "path
breaking reform in partnership with the States"
HAS
THE EMPOWERED COMMITTEE THROWN A SPANNER IN THE WORKS?
Subsequently
the empowered Committee of State Finance Ministers had decided to reduce
the rate of tax on medicines to 4%.
It
appears that the decision to reduce the rate of tax on medicines to
4% close to the scheduled implementation of VAT may have been taken
without taking the Finance Ministry into confidence. It is estimated
that the revenue loss on the reduction of VAT on medicines to 4% from
the RNR may result in revenue loss of about Rs.5000 Crores to the States.
The
schedule of goods and the rates of tax had been agreed to long back.
The Central Government had also agreed to compensate the States for
the probable revenue loss ( based on the rates of tax on goods decided
already) on switch over to VAT as per the agreed formula.
Replying
to the debate on the Finance Bill in the Lok Sabha, Mr.Jaswant Singh
observed as follows on the possibility of implementation of VAT from
1st June 2003 and the decision to
reduce tax on medicines to 4%
"It
is very important that the legislations of the States are amended
to conform to the model draft law and also to the agreed upon rates
latest by the 5th of May, otherwise it not be possible to introduce
VAT by June 1,2003."
He
also said that the States would not be allowed to deviate from the
agreed list of commodities that are to be subject to a 12.5% per cent
rate of VAT.
MR.
JASWANT SINGH SAYS VAT SHOULD NOT BE VEXATION ADDING TAX
Replying
to the debate on the Finance Bill 2003 in the Rajya Sabha, Mr.Jaswant
observed
"
Being an important step in reforming the tax structure, we do not
want it to become a Vexatious Tax system. In VAT we want value added,
and not resort to vexation adding"
CENTRE
TO DRAW NEW ROADMAP
The
last word from the Centre is an official release on the 15th May 2003,
that the Centre would draw up a "new roadmap" to introduce
VAT in consultation with the political parties and the Empowered Committee
of State Finance Ministers. The finance ministry has reiterated that
VAT will be implemented "only after full preparation" to enable
the States to reap the "full benefits" of the new tax and
that patch work implementation of VAT will not be tolerated. The proposed
publicity campaign has also been deferred.
EMPOWERED
COMMITTEE MEETINGS DEFERRED
The
last straw was the decision of the empowered committee of state finance
ministers not to meet till they discuss the issues with the finance
minister.
The
Central Government is yet to draw up a "new roadmap". Though
this may have pushed back the whole exercise to square one, the opportunity
should be used to iron out the outstanding issues.
Now
on to some of the issues and the possible solutions
CENTRE
TO TAKE THE NEXT STEP
The
Finance Minister had said that the Centre has evolved a set of parameters
on issues on which the VAT legislation should have feasible common ground
and that the Centre must get satisfied that the States implementing
VAT conform to these parameters.
The
Finance Minister had also said that the Finance Ministry would soon
send the checklist to the States so that the States addresses its various
components and the concerns spelt out by the Centre.
Mr.
Jaswant Singh has also stated that it is important to follow a uniform
framework in terms of the basic structure of both the law and the rates
across the States for ease of administration, avoiding distortions as
well as unifying the nation’s markets.
With
elections to the State Assemblies round the corner, it is not clear
if the Finance Minister would announce the "new roadmap" soon.
At
least the consultation process with the political parties should be
initiated soon and the political parties should agree that VAT would
not be made an election issue.
COMPENSATION
OF REVENUE LOSS TO STATES
One issue that will continue to be contentious
will be the compensation for possible revenue loss to the States.
Though the Central Government had agreed
to compensate the States as per an agreed formula, there are bound to
be problems in quantification of the loss.
One possible solution to reduce revenue
loss to the States is to introduce a new slab rate of tax of 8% and
to fix the RNR in the 10% to 12% band as may be decided by the respective
States. This will be beneficial to the trade and Industry and also to
the consumers.
It is to be appreciated that the rate of
tax on most of the goods, particularly in the northern states, had been
in the 8% to 10% band. In the VAT rate structure, the goods in the 8%
to 10% band have moved either to the 4% or to 12.5%.
The 8% slab will help the States to partly
overcome the possible revenue loss and will also be a disincentive to
tax evasion in case the goods had moved to the 12.5% slab. Fixing the
VAT rate of tax on drugs and medicines in the 8% slab will not meet
with much opposition as these goods are subject to 8% tax in most of
the States.
As revenue becomes buoyant in the future
the rate structure can revised to have fewer rates.
Diehard VAT protagonist and Economist will
scoff at the suggestion for addition of one more rate of tax as multiplicity
of rates of tax is not a VAT virtue. It must be appreciated that it
took the Centre 4 years to align and rationalise the Central Excise
Rates. Should the States be expected to align the rates at one go? The
States should be allowed 2-3 years time frame to align the rates of
tax into a three rate structure.
STATES
TO GEAR UP
As
on 1st April 2003 only a few States were fully ready. The VAT legislation,
notification of Rules and forms etc., were in different stages of processing.
Only West Bengal. Gujarat, Maharashtra, Andhra Pradesh and Karnataka
had sent their VAT Bills for the President’s assent. In some of these
States the draft Rules and Forms had not been made available. Even if
the work had proceeded at a fast pace, the process would require at
least three months and the States could not have introduced VAT on the
1st April 2003.
The
empowered Committee has in the meeting held in April taken decisions
on several issues like continuance of exemption schemes etc.,
The
statement of the Finance Minister that the State legislation should
conform to certain minimum set of common provisions casts a great responsibility
on the Empowered Committee and the States to fine tune the VAT legislation
in consultation with the Centre.
The
momentum gained in the built up to the implementation of VAT from 1st
April 2003 seems to have been lost.
It
is not known if the Finance Ministry has circulated the checklist to
the respective States for ensuring uniformity in key issues.
The
States should use the hiatus to streamline the administration to usher
in VAT at short notice.
ADDRESS
THE CONCERNS OF THE TRADERS
I believe that the opposition of the traders
is not to the implementation of VAT, per se, but to the harsher provisions
in the VAT Act. It is true that some of the State draft Act contain
stringent prosecution provisions which require to be watered down to
be not harsher that the provisions in the present Sales Tax Act of the
respective States.
The VAT threshold limit has been increased
by the Empowered Committee to Rs.40 lakhs and this should partly satisfy
the trade.
In my opinion fixing an even higher threshold
should not be an issue as the 1% tax on sales without set off will realise
more revenue to the States than if the dealer had been subject to VAT,
particularly in commodities where the retail profit margin is lesser.
Let me illustrate with an example,
Take the case of a commodity costing Rs.10,000
and subject to VAT at 12.5% and on which the retailers margin is 8%
( the presumptive profit margin for retail dealer under the income tax
Act).
The selling price would be Rs.10,800 and
the tax payable @1% would be Rs.108/-
VAT @12.5% on the value addition of Rs.800
would be 100/-
The dealer would only opt for VAT and not
for the presumptive tax of 1%. The benefit to the dealer would be more
pronounced when the retail margin is lower as is the case with higher
priced consumer products.
What is required is an information campaign
to dispel the misinformation to the traders.
VAT
IMPLEMENTATION IS A PROCESS AND IS NOT A ONE SHOT AFFAIR
The statement of the Finance Minister that
the VAT implementation should not be a "patch work" and should
be put on hold till perfection is achieved in the legislation should
be dismissed as one more reason to justify an otherwise political decision
to defer implementation of VAT. The fact that the States had achieved
consensus on most of the issues is in itself an achievement of the Empowered
Committee.
The Finance Minister is not too naïve to
fail to appreciate that the transformation of the taxation system can
take place only as a process and not as a one shot event.
With elections to the State Assemblies
due shortly, the earliest possible date of implementation is the next
fiscal year. There are rumours that the elections to the Parliament
may be advanced and in that event the implementation of VAT will have
to wait till the new Central Government assumes office.
With repeated postponement of the date
of implementation of VAT, any announcement of the next deadline will
not be taken seriously by trade and industry.
So the next deadline announcement must
carry conviction and political commitment.
18/06/2003
|
