VAT next?

The country’s state finance ministers met P. Chidambaram to discuss the steps in the move towards a Valued Added Tax (VAT). Two major issues remain unanswered. Will each state have checkpoints to refund VAT at state borders, making things worse for truckers than was the case with the octroi that the VAT proposes to replace? The ministers do not clearly and categorically say that this will not be the case. Strange as it may seem, India is not a single national market. We now have a tragedy shaping up on our hands, in the form of the expensive roads built by NHAI, which are nullified by checkpoints at state boundaries. A massive cost has been paid by the nation in building these roads, which cuts down a truck’s drive time to 1000 km in 13 hours. But in these 1000 km, another 48 hours are wasted at state boundaries. In addition, each of these checkpoints creates corruption and extra charges.

The second major aspect of VAT is the treatment of imports and exports. If Indian goods are charged at a certain VAT rate, then it is only fair that imported goods are charged a VAT at the identical rate. Not to do so would be unfair to the domestic producer. India is making precisely this mistake, owing to the lack of sensible taxation by state governments. When goods come into the country, they are charged duty (reflecting the central VAT). But they are not charged a second VAT because state governments have yet to get their fiscal policy in order. India has made great progress in cutting customs duties, and there is a broad consensus on the need to cut customs duties further. But this effort has now been stymied by the problem of not charging a state VAT on imports. On any product, if a customs duty is zero, domestic producers suffer a non-level playing field.

The question is: how will this be achieved? What is needed is a concrete action plan and an excellent income tax system, which combines the elimination of checkpoints at state boundaries and the correct treatment of imports and exports. The answer will be central to India’s domestic and foreign trade and its growth strategy. It is too important to be left to the states. The FM needs to put it on top of the reforms agenda.