Taking VAT forward

Regardless of all the problems that appear to be facing the VAT, the very fact that 20 states now come under the new regime is a significant development and one that promises a new and modern taxation system for India. After failing to meet at least five similar deadlines, the empowered committee on state VAT, chaired by Bengal Finance Minister Asim Dasgupta, has taken the correct and courageous decision to press ahead this time. On earlier occasions, the decision to implement VAT had been postponed due to a lack of preparation on the part of the administration or the inability to get all states together to agree to a harmonised system. Today, despite major and minor snags and glitches, and despite the BJP states taking the retrogressive stand of opting out of the regime, VAT has come into force in a major part of India.

Inadequate preparation for VAT may still, however, come as a constraint to the smooth implementation of the system. Take, for instance, the differences in the rates. The two rates of 4 and 12.5 per cent mean that in many cases there may still be an incentive to evade taxes and stay out of the VAT net. This might defeat the objective of increasing the public compliance that is expected to come with the VAT. Also, there seems to be a lack of harmony between the lists that the different states are proposing. This, again, could lead to difficulties which may become visible over the next few weeks as tax returns are filed. It is important that the states that have been brave enough to implement the VAT, address these problems and solve them as soon as possible.

It is also important now that the Central government starts chipping in. The state VAT is a precursor to a country-wide Goods and Services Tax (GST). The importance of the GST as India faces an increasingly competitive global environment cannot be adequately emphasised. The GST cannot succeed at the level of a large country like India based on paper work. This has also been the Chinese experience, which introduced a paper form based GST in 1994. Unless the GST rides on an IT system, it can become a major source of false claims and corruption. Those states implementing the VAT must not only get compensation for loss of revenue from the Centre, they should get financial and technical support to build and operate modern IT systems. Countries such as Brazil which implemented the VAT many decades ago are still struggling to get it right. But then Brazil has always been tomorrow’s big economic power. India cannot afford to be just that. It therefore needs to get the GST right as soon as possible. The states have shown that they have the resilience to reform their system of taxation. Now it is for the Centre to help them do it well.