Despite the initial glitches, the experience with state VAT has, in general, been positive. The empowered committee on VAT will now review its implementation, some five months after it came into force. The state VAT is the first step towards a single tax of the country — the Goods and Services Tax (GST). It is already in place in most countries around the world, including our South Asian neighbours — Pakistan, Bangladesh and Sri Lanka. It is the moment, therefore, for India to purposefully move towards a VAT-based GST. However, this project has been shackled by the failure of some states to join the system. This is the right time for those states who kept themselves out of the VAT regime to reconsider their position on the issue. By joining in, they will be helping in implementing the next stage of tax reform. Considering that the state VAT has not created the kind of problems envisaged but has, on the contrary, offered benefits to consumers by lowering prices of some goods, even while raising the revenues of many state governments, it appears increasingly churlish for Uttar Pradesh and the BJP states to keep out of the system.Another major difficulty with the present regime arises from rate differentials. Different rates on different items make little sense within the VAT framework. Input credit given at 4 per cent on raw materials is not adequate encouragement to pay a 12.5 per cent tax. Different rates across states create further distortions. When rates are different across states, it is not difficult to imagine that buyers will move to markets which charge the lowest rate. Often these are just across the border and do not involve any significant transport costs. The states need to realise that while fiscal federalism is important, India has to compete with other countries in a globalised economy. Fiscal federalism should be India’s strength, not its weakness. The VAT, in its very design, is not a local tax, any more than the income tax. It will work best if it is allowed to function as a national tax. If rates are different across states, the VAT will fail to serve India as effectively and efficiently as it has other countries.The Centre now needs to play a far more pro-active role than it has in the past. It must extend support to the states in order to create a modern Tax Information Network (TIN) type IT system, on which the tax rides. This can be later adopted by the states when a national level GST comes into place.
