Traders are unhappy at the impending introduction of State VAT. Their concerns are misplaced in some respects and well placed in others. It ...
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Traders are unhappy at the impending introduction of State VAT. Their concerns are misplaced in some respects and well placed in others. It is important to observe that a correctly implemented VAT is a 8220;consumption tax8221; in that the incidence of the tax falls only on the end-consumer. The middle man or the trader or various stages of production are unaffected. In other words, the only loser 8212; with a well implemented VAT 8212; is the tax evader. Tax evaders obviously dislike improvements in tax policy which tighten enforcement.
But there are genuine problems in the current efforts which need to be addressed, primarily in implementation. First is the issue of the cutoff above which firms come into the VAT net. A limit like Rs 5 lakh is much too low; it reaches establishments where the cost of tax compliance is big compared with the scale of the business. The Fiscal Responsibility and Budgetary Management Task Force report had looked at data about firms in India, and found that a limit like Rs 50 lakh of turnover is what makes sense. Through this, a Goods and Services Tax would cover just 100,000 establishments in India, and has sufficient revenue potential.
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The second issue is that of administration. Firms and government will have to deal with millions of pieces of paper. Crudely speaking, if each firm generates four invoices a day, a VAT covering 100,000 firms will involve 100 million pieces of paper per year. A paper-based system for VAT will be an administrative nightmare. Fake bills will be created 8212; just like fake TDS claims came about in income tax. Unfortunately, the implementation efforts on VAT so far have not displayed the vision required to build a VAT based on a modern IT system VAT, where no paper will be generated. Instead of leaping to the frontiers, we are starting where other countries were in 1950, with pieces of paper. The implementation of VAT critically depends on vision and leadership in administration. A poorly implemented VAT will generate a political backlash, which will give VAT itself a bad name. A concerted administration effort, if begun in 2005, will take till 2007 to yield results, which will be just in time for the 2008-09 target of removing the revenue deficit. Many months have been wasted in blundering around; the time to get going on this quest is right now.
