The Hindu Business Line : A big step on VAT

THE COUNTRY HAS taken a significant step towards a value-added taxation regime, with the Centre and State governments agreeing on a framework of a compensation package, should there be a revenue loss for the latter consequent to the switch to the VAT system. For calculating the compensation, the Centre will take into account the tax collections of each State right till the day of VAT implementation. This comes as a major concession by the Centre which had been insisting on a cut-off date of 2001-02 — the year first set for VAT implementation. To allay the apprehension of the States on this score, it has promised to take the average of the three best years of sales tax revenue growth between 2000-01 and 2004-05 and take that as the notional rate of growth of sales tax revenues had VAT not been introduced.

Viewed purely from the framework of core principles of public finance, the wrangling all these days over the question was unwarranted. If VAT was inherently a more progressive measure, then it ought to have been the basis of taxation even if it had had some adverse consequences to the exchequer in the short term. More so, if the initiative would have led to a buoyancy in tax revenues, as the proponents of such a system have argued and the Finance Minister, Mr P. Chidambaram, has endorsed. There ought not to have been any misgivings, such as the bogus argument of loss of tax revenues for the States, which have unnecessarily delayed implementation of VAT. Now, the Centre has given the States a blank cheque to secure their acquiescence. Yet, wittingly or otherwise, this has given the impression that VAT is being pushed down the throats of the States rather than being a product of a collective decision. This would have made difficult the task of securing on a long-term basis a new regime of taxation at the sub-national level. Sooner or later, States would have cried foul as their need for resources increased even as their capacity for efficient administration kept falling.

It is just as well that the Centre and the States have at least now put the issue behind them and are getting on with the task of putting VAT in place. But there still remains the task of securing the acquiescence of the merchant community that appears apprehensive of the measure. It could be that the trade is merely suspicious of any new tax initiative, subjected as it is to an oppressive tax enforcement machinery. Or it may simply be opposed to a regime that seeks to plug the loopholes in the current tax system. This opposition cannot be wished away and could well become a factor in the commitment of the States to implement the VAT system in earnest. These challenges will have to be met resolutely and imaginatively if VAT has to have a chance to succeed.