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A new date for VAT

WHEN THE DECISION to further postpone the VAT regime was announced at the start of the new financial year, there was hardly any surprise. Neither were the two earlier deferrals surprising. The announcement of a new date was widely anticipated although this time it is evident that even the initial support for VAT is lukewarm compared to the previous occasions. It has been claimed that only 16 States and Union Territories will switch over to the new regime on June 1, with a few more States possibly joining in by that time. In contrast, the decision of a committee of State Finance Ministers in January this year to implement the VAT regime from April 1 seemed more emphatic. A majority of States had agreed to the change. The Centre, which is playing its facilitating role to the hilt, had announced a number of steps to address the concerns of the States. A formula to compensate them for a possible revenue loss in the initial three years was announced in January and subsequently blessed by the Union budget. Besides, it was proposed to let the States tap newer sources of revenue including a tax on services and even in a post-VAT regime levy a tax on textiles, sugar and tobacco. The Central Sales Tax was to be modified and all indirect taxes at the Centre made compatible with the State-level VAT. The primary responsibility for sticking to the VAT timetable was always with the States. Yet, despite the apparent consensus reached on its introduction, very few States have had the political will to see it through. Despite the convincing arguments in favour of the new regime, implementing it on time has been the most difficult part, year after year. Added to this is the fact that elections are to be held soon in important North Indian States. A few of those, Delhi notably, have led the charge against the new tax regime.

Lack of preparedness and concerted opposition from the politically influential trading community had forced a postponement for the third time in a row. It would be very surprising if even the far less ambitious VAT proposal (with fewer States agreeing at the outset) will be implemented in less than two months' time. There have always been nagging worries as to whether a tax proposal like this one can be implemented successfully without a majority of States participating simultaneously. Among other strong arguments in its favour has been its ability to avoid competition among States in levying indirect taxes thereby distorting State finances as well as inter-State trade in the aggregate. The political opposition cannot be expected to be any less over the next few months. More important, however, is to gauge the level of preparedness, among the taxpayers, the States and the Centre. Since the incidence of the tax cannot be accurately estimated it is certain that consumers will face distortions at the retail level in the initial years of the new tax. It is too much to expect that within the time available any of these key constituencies would be substantially better equipped or educated than they were at the close of the last fiscal year. It is worth noting that VAT's introduction was considered a certainty despite all evidence pointing to a state of confusion among all the affected parties. Even on April 1, the tax administrations of many States as well as influential bodies of traders were kept in the dark even on such basic matters as the commencement of the new tax and its practical implications, both on revenue and tax administration. One wonders whether enough can be done in the next 50 days to ensure a much higher level of preparedness. As it is, the move towards VAT has had a chequered history in this country. Evidently, not all the three postponements have had the salutary effect of forcing the pace not just in announcing new dates but also in ensuring a much higher level of preparedness all-round.

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