VAT Scan

Expect a fair bit of confusion ‘‘Don’t expect a Ram Rajya from April 1,’’ says Ramesh Chandra, secretary of the empowered committee, tongue firmly in cheek.

But given that VAT will bring about a transparent, progressive and uniform tax structure across the country, all players seem willing to take a little bit of confusion in their stride. Says M Govinda Rao, director of the National Institute of Public Finance and Policy: ‘‘Some confusion is certain and it’s not the ideal situation, but it’s the best we can have and should have.’’

Tough Call For Those Missing In Action

How will the new tax system work without eight states on the ball? Will there be confusion when goods travel from a VAT state to a non-VAT one and vice-versa? The problem is minimal, say most of the states that have signed up. Let’s take the issue of central sales tax first: Since the 4 per cent tax will continue for three years, goods travelling from a VAT state to a non-VAT state will be charged 4 per cent CST and then, subsequently, the applicable sales tax rate in the non-VAT state. And vice-versa.

On other fronts, however, the non-VAT states will lose out. Here’s how: For products where the VAT rate is less than the sales tax rate in non-VAT states (mostly products that attract a VAT of 4 pc) business is expected to shift to the VAT states. On the other hand, products where the VAT rate is higher than the sales tax rate (mostly products at 12.5 pc VAT), business is expected to shift to the non-VAT states. However, as Govinda Rao explains, ‘‘Since the bulk of commodities under VAT falls under the 4 pc slab, more business will shift from non-VAT to VAT states.’’ Of course, VAT states also get compensated for any loss of revenue, albeit over three years. ‘‘The BJP-ruled states have shot themselves in the foot,’’ Rao adds.

And Then There Were Twenty-One

Speak to the VAT states surrounded by non-VAT ones—like Delhi, Maharashtra, Kerala—and they see don’t seem worried at all. For instance, state government officials in Kerala aver that trade and manufacturing sectors in Kerala will have a clear edge vis-a-vis non-VAT states like, say, Tamil Nadu, thanks to the tax set-off or refund when they make inter-state sales. This will make them more competitive.

Maharashtra’s additional chief secretary (finance) O P Gehrotra adds that there will be little confusion on transition of goods from a VAT state to another VAT state through a non-VAT state. That’s because the IT system to track inter-state transactions—TINXSYS—will be eventually in place in all states, with or without VAT. So, the system can be used to track any tax evasion in a pan-India way.

Of course, the pan-India IT system will take some time to be implemented; in the meantime, there will be glitches in the paper-based system. ‘‘We see a little confusion in transition of goods, but we hope that for larger harmony in the structure, the non-VAT states also implement VAT soon,’’ says a senior Delhi government official.

A possible solution comes in the form of Tamil Nadu. Though the state is not implementing VAT, it is offering 100 per cent self assessment and also a set-off. These are crucial components of the VAT regime. ‘‘You may call it VAT or non-VAT, but if the other non-VAT states offer these two components, we are done,’’ Chandra said.

In fact, a number of members of the empowered committee are also mooting this idea. If the non-VAT states follow this example, this is acceptable to one and all. However, if the ultimate aim of the BJP is to ensure that VAT does not take off smoothly, then it is unlikely that BJP-ruled states will follow suit.

Solutions & The Long Road Ahead

Which brings us to the BJP’s baffling decision to pull out of the VAT bandwagon. Avers Asim Dasgupta, chairman of VAT panel, ‘‘Most of these BJP-ruled states were better equipped than others to implement VAT. Some of these states have earlier even gone as far as to educate other states on VAT.’’ Uttaranchal, for instance, is supposed to have the best VAT legislation in the country. Ditto for other BJP states.

Senior BJP leader Yashwant Sinha has said the BJP states will implement VAT only after the Centre comes out with a concrete plan to phase out CST. ‘‘It’s already been decided that CST will be out in three years,’’ says Chandra.

In fact, even within the BJP states, a large section is still in favour of shifting to the VAT regime. According to Vipin Malik, chairman of the Madhya Pradesh chapter of the CII, ‘‘It’s unfortunate, a big setback to the ambitious taxation programme. A section fears maintenance of books and cleaning up of records, that explains the opposition. But for industry, the deferment in implementation could put us at a disadvantage.’’ Adds an official in the commercial tax department in Chhattisgarh, ‘‘If VAT is implemented, tax evasion will be minimised and goods will become cheaper. But traders will not let it happen.’’ Indeed, small traders are opposing the new tax system since it will definitely put an end to their concept of the kaccha bill. All their transactions will come under tax scrutiny and this is not what they want. The fact is that the bulk of the opposition to VAT is coming from the traders, not from industry. All the major industry chambers have come out strongly in favour of VAT. Says Arvind Parikh, director, finance, of Jindal Strips, ‘‘It’ll indeed streamline the tax procedure and it’s good for both industry and the state. Tax evasion will come down.’’

A possible trigger could be the empowered committee’s decision to re-visit VAT rates in June. For this is one tax that makes good economics.