TAMIL NADU

NO VETO ON VAT

THE LACK OF unanimity among States on the introduction of the value added tax (VAT) in place of sales tax from April 1, 2005, after five years of deliberations and consensual decisions arrived at through an Empowered Committee of Finance Ministers, is a reflection more of political perceptions and calculations than of the merits of the proposed system. This is clear from the fact that the States now dragging their feet on the issue had all along agreed `in principle' with the need for the reform, and in the case of all but one even on the latest target date of April 1. The agreement in principle was facilitated by the Centre's offer to compensate States on a tapering basis for any shortfall in revenue that the implementation of VAT might cause, and by the consensus among States to continue for one year with the Central sales tax on inter-State transactions. The question is whether a "willing coalition" of States (numbering 21 according to the Union Finance Minister, P. Chidambaram) should go ahead with implementing VAT as scheduled, without waiting for others to get on board.

One way of looking at the issue is that in a federal system States are best left to their own devices in deciding on major policy issues that fall within their constitutional domain. Another way of posing the question, even if rather negatively, is whether it is desirable to encourage some States to wield in effect the power of veto over others on a measure that has been accepted in principle as a progressive reform. Whichever way one looks at it, this much is clear. Given the progress achieved thus far in moving towards a State level VAT and the fact that any system can only be fine-tuned and perfected after it is operationalised, wisdom lies in encouraging willing States to go ahead and usher in VAT from next month, and in letting the experience of a dual system show the way to the future. Such an option will not satisfy those looking to exploit the potential India offers to manufacturers, especially domestic producers, as a large common market. The half glass will mean that complexities will continue to dog producers as they set retail prices and manage the supply chain. However, it may be argued with equal force that if consumer choice and competition among producers are good for the economy, policy choice and competition among States to protect their perceived interests with instruments of their preference will be no less desirable.

Over the years, impending elections have tended to put the brakes on governments committing themselves on difficult policy choices. Since some State or another is likely to face Assembly elections every once in a while, the prospect of unanimous agreement on a new target date for introducing VAT is always dim. This has proved to be hard on States, especially those with a developed manufacturing industry and those aspiring to graduate to this status, who have had to wait indefinitely to introduce VAT. It is true that the manufacturing sector, as a pillar of economic growth, has the biggest stake in the many advantages the VAT system offers all along the value chain. However, one cannot discount the benefits it will bring to State exchequers by way of a wider tax base, higher revenues, and lower levels of corruption. These are goals politicians can ignore only at the cost of India's long-term interests.

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