Vat benefits

Jharkhand, the latest state to announce its decision to switch to the State VAT, must be commended. Despite being a BJP-ruled state at a time when the BJP leadership is preventing its states from joining the Vat regime, Jharkhand has chosen to do the sensible thing. It indicates either a change in the stance of BJP’s leaders, or some creditable independence on the part of Jharkhand’s leaders. This leaves six major states out of the system — Rajasthan, Chhattisgarh, Madhya Pradesh, Gujarat, Tamil Nadu and UP. Talks have been taking place with political leaders to get them to join in.

By staying out of the State Vat regime, the BJP has a political point to make. But what is UP’s excuse? The arguments against the State Vat are, in any case, getting weaker by the day. The performance of state revenues in the first five months of 2005 — April to August — has been encouraging. Revenues have grown at 16 per cent — higher than the 12 per cent historical average. Some states like Karnataka, Punjab and Delhi, have witnessed even stronger revenue growth at 25 per cent. The resistance that was to be expected from the trader community, which now cannot evade taxes as easily as it could under the earlier system, has been a token one. This is also because of many sensible changes made to the VAT rules which ensured that small traders did not get unnecessarily burdened under the new administration. The self-assessment system in the State VAT also reduced the scope for harassment of traders by sales tax officials. An information network, allowing states to cross-check payment information has been put to trial and is expected to improve compliance and reduce evasion further. The Central Sales Tax (CST), which has to go by 2007, will now be reduced from 4 per cent to 2 per cent in the next fiscal year. Moreover, the Centre has assured any state worried about revenue loss of compensation. With Jharkhand and Uttaranchal joining in, the case in favour of the VAT has been further strengthened. It is important that all states join the system, otherwise the unscrupulous could exploit the differences in the tax regime between states. This would be unfair to all honest tax payers.

Also, we need to remember that the State VAT is an intermediate step towards the proposed Goods and Services Tax, which is a value added tax on all goods and services produced in the country. When 130 countries, including India’s neighbours like Pakistan, Bangladesh, Sri Lanka and China, have implemented the VAT, making their manufacturing more competitive, we need to join up or get left behind.