Heat over VAT

TAMIL NADU WAS among the first States to introduce legislation for value-added tax on resellers, from November 1996, without any preparation or even familiarity with the concept among the tax administrators and trade and industry. The then DMK regime inevitably had to suspend the provision with immediate effect. Since then a lot of nationwide discussions and a firm decision by the Empowered Committee of State Finance Ministers have taken place for a switchover to VAT — the universally adopted mode of commodity taxation — considering its many merits and the imperatives of global and domestic competition. However, Tamil Nadu again stands out at present, but by way of its foot-dragging approach and lack of energetic initiatives to introduce VAT. The remarks made by the Finance Minister, C. Ponnaiyan, at a conference on Friday, about the various hurdles in the implementation of VAT and raising doubts about its success in many countries fit into this mindset.

Introduction of a radically new system requires, on the part of those who have agreed to the concept, a proactive public communication and advocacy. This has not been evident in Tamil Nadu ever since the botched legislation of 1996. The present Government has done no better in this regard. The discussion paper on VAT, put on the website of the Commercial Taxes Department months ago, admittedly avoids a "theoretical" enunciation and any attempt to popularise the concept. Spokesmen of the Government too have not been seen in public fora displaying evidence of their own conviction in favour of VAT, whose merits are well known. These include widening of the tax base, especially when the value addition after the manufacturing stage by way of transportation, packaging, repackaging and retailing in a developing economy is substantial and escapes tax when it is levied only at the first point. This, and other benefits such as creation of a vested interest among traders in the distribution chain to ask for or issue proper invoices, stopping the "cascading effect" of the present tax system on prices, and equally importantly, facilitating choice by entrepreneurs of products and processes based purely on techno-economic considerations uninfluenced by differential tax rates on inputs, are positives that are too weighty to be made hostage to differences over the manner of phase-out of Central Sales Tax (CST) or long-term issues such as devolution of Central funds under the norms of the Finance Commission.

Yet, this is what Tamil Nadu seems to be doing. If VAT is welcome for manufacturers, certainly it cannot be a negative factor for the economy, since manufacturers are keen on cost reduction. Small traders, understandably, are reluctant to get into elaborate record keeping but this issue requires nothing more ingenuous than an appropriate level of turnover below which a simple compounded tax can be levied. Large traders should not have difficulty in computerisation. A few States have already publicised their draft legislation for VAT and some even their draft rules, considering that the present (postponed) deadline is April 1, 2003. For a State such as Tamil Nadu that has proclaimed its intention to become number one in industrialisation, a simple two-rate (plus zero-rate) tax structure should be a priority. For, as some cynic said, if the most certain things in the world are death and taxes, then the most uncertain thing is the manner of their occurrence! If uncertainty in tax rates is removed, this itself would be an invitation to investment. Also, there is enough scope for States to take care of their special interests within the VAT scheme. That should be obvious to the Tamil Nadu Government, which has gone to the extent of proclaiming its sovereignty with respect to international trade by imposing a discriminatory tax on imports in the current year's budget.