Crucial issues

The main concern of the Empowered Committee's white paper indicating the main design of VAT is "striking a balance between the needed convergence and federal flexibility as well as ground level reality".

While it has worked out an agreed design for all States, it has not been able to suggest classifications of goods and the VAT rates acceptable to all States and the industrial and trading communities.

The Secretary to the Empowered Committee, after a recent meeting in early March, observed: "There is bound to be some friction whenever there is movement to a new regime. But we will stick to the April deadline. There will be no deviation this time."

Whether this promise will be delivered depends on how some outstanding issues are resolved. One of the crucial issues centres round the threshold limit for coverage of traders and compensation for revenue loss. The Empowered Committee has agreed to revise the threshold limit from Rs 5 lakh to Rs 10 lakh, with an upper limit of Rs 50 lakh. It has indicated that the Rs 5 lakh to Rs 50 lakh range would be based on taxable turnover and not gross turnover. Traders within this limit can pay a composite VAT of 1 per cent but they will not be entitled to input credit.

The VAT regime is expected to cover 550 items of which 46 natural and unprocessed local products will be exempted. Agricultural and industrial inputs will attract 4 per cent tax, and other items 12.5 per cent. States will have the power to exempt foodgrains and seeds.

The formula for compensation for loss of revenue to the State has been indicated, but the response from the States has not been uniform as it is not clear whether the higher threshold level will mean lower compensation.

Various States have estimated the potential loss of revenue differently. Karnataka has projected a loss of Rs 2,160 crore, Andhra Pradesh around Rs 800 crore, and Tamil Nadu Rs 1,200 crore. Given these variations in estimates and the Centre's assurance of 100 per cent compensation in the first year, it is not clear whether the budgetary provision of Rs 5000 crore will be adequate.

The other major issue is the phasing out of the Central Sales Tax (CST). According to the white paper of the Empowered Committee, the States are collecting nearly Rs 15,000 crore every year from CST. And, therefore, the Centre needs to compensate the States for this loss. States have demanded a definite commitment on this count. For example, the Rajasthan Chief Minister, Ms Vasundhara Raje, said on March 10, "We have repeatedly made it clear both to the Union Finance Minister and the VAT Panel Chairman, Mr Ashim Das Gupta, that VAT cannot be implemented in its present form unless the Centre spells out the roadmap on phasing out the CST."

Other issues include the need to put in place a regulatory framework in the form of Taxation Information Exchange System to give a comprehensive picture of inter-State trade of all commodities, and the need to bring inputs into the VAT chain.

As with any proposal to modify or change a long established system there are problems common to all States and some that are specific to individual States. The Empowered Committee mentioned in its white paper regarding "the balance between what can be done to begin with and what should be incorporated subsequently for further perfection of the VAT system".

This is an area where only some States have done the necessary legwork to convince representatives of trade and industry that teething problems can be sorted out in due course.

Perceptions on what can and will be done varied from State to State depending on its financial health and credibility of its political players.

While all these issues have the attention of the Empowered Committee and the Finance Ministry, the Constitutional question raised by Dr Ashok Mitra is all together a new issue.

The understanding is that at the State level, VAT can be introduced in terms of Entry 54 of the States List which is provided in the Seventh Schedule, that deals with the distribution of the legislative powers between Parliament and State Legislatures, Article 246 of the Constitution.

This entry introduced by the Sixth Constitutional Amendment Act of 1956 states: "Taxes on sale or purchase of goods other than newspapers, subject to the provision of Entry 92 A of list 1."

The relevant entry in the Union List of the Seventh Schedule states: "Taxes on the sale or purchase of goods other than newspapers were such sale or purchase takes place in the course of inter-State trade or commerce."

Whether the power to levy tax on sale or purchase of goods can be applied to cover concepts of setting-off for tax paid earlier and providing input tax credit is an issue yet to be settled by the judiciary.

We should perhaps wait and watch whether the VAT regime debate will now shift from economics to legal fronts. Or should we say, VAT ever will be, will be.

(Concluded)

(The author, a former IAS officer, is vice-chairman and honorary director, Indian Institute of Economics, Hyderabad.)

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