You
must have definitely heard the phrase “God’s Own Country”
being used to describe Kerala as one of the best destinations
for tourists.
According
to Hindu Mythology Kerala was created by Lord Parasurama
(incarnation of Lord Vishnu) who threw his axe from
Kanya Kumari and the Sea Lord Varuna retreated to the
position where the axe fell. The land mass created by
the Lord himself is known as “God’s Own Country”.
Nestled
between the Western Ghats and the Arabian Sea and endowed
with exotic flora and fauna, serene rivers, lagoons
and stretch of backwaters and beaches, Kerala is indeed
a paradise. God’s Own Country Really.
As
I study the development on VAT in Kerala, I wondered
if the recent attempt to levy VAT at MRP/RSP at the
first/intermediate stage of sale in the supply chain
would make one to call the Kerala model of VAT as “God’s
Own VAT”.
Though
I have not had an occasion to meet the Economist Finance
Minister of Kerala Sri. T M Thomas Isaac, I admired
him for his forthright comments on the ineffectiveness
of scrutiny assessment in raising revenue. In the 2006
budget speech the Finance Minister observed as follows,
while announcing the decision to summarily complete
assessments pending under the KGST Act.
Para
196. “We must dispose off all the pending assessments
under the KGST Act within a fixed time period so that
we can concentrate all the energies of the Department
on VAT. Around 34,000 cases under section 17(4) were
disposed last year. By their very nature they failed
to yield even one rupee by way of additional revenue.
Sir, I gather courage from this fact and make bold to
propose that the about 94,000 pending assessments under
section 17(4), in respect of which no offence has been
booked during the period in question, will be deemed
to have been completed, by making a specific provision
in the KGST Act. I will also provide sufficient safeguards
to re-open such cases of these as may be necessary to
safeguard revenue.”
The
Finance Minister followed up with formalizing fast track
assessment of pending assessment in a transparent manner
by a team of officers.
In
the same Budget speech the Finance Minister set the
tone for adoption of its own model of VAT by asserting
that Kerala is taking a position that the uniform rate
of VAT adopted by the Empowered committee is only a
floor rate.
Para
198 of the Budget Speech
“A
major reason for the fall in revenue under VAT is that
tax rates were reduced across the board in line with
the decisions of the Empowered Committee of State Finance
Ministers. Kerala society had come to accept higher
tax rates here; as such there was no reason why they
should have been reduced. With VAT, tax rates on 170
items were reduced and tax rates of only 34 items raised.
The Centre for Taxation Studies has reported that Kerala’s
weighted average tax rate under KGST on 31-3-2005 was
17.39 per cent. Not surprisingly, Kerala’s tax revenues
under VAT have declined because of the fall in tax rates.
Hence we have taken the position in the Empowered Committee
of State Finance Ministers that the VAT rates adopted
by them should be treated only as floor rates, and that
the States should be permitted to charge higher rates
depending upon local conditions. In our view this flexibility
is vital to maintaining the vitality of fiscal federalism.
Hence I propose to amend section 93
(click
to read Section 93) of the KVAT Act
2003 to remove any doubts in the matter.”
The
Finance Minister levied tax at 20% on certain consumer
durables, building materials, health drinks, mineral
water and soft drinks.
(click
to view list of goods subject to tax at 20%)
While
some sort of admonishing or protest was expected from
the Empowered Committee, I was surprised at the muted
reaction that the change in rate of tax of few goods
is not a matter of concern. The reaction is understandable
as the Empowered Committee cannot really interfere in
the Constitutional right of a State to determine the
rate on tax.
I
was sceptical at that point of time on the levy of higher
rate of tax in Kerala since I believed that the move
would be counterproductive as it would only encourage
cross border shopping and evasion of tax.
The
Finance Minister being pragmatic realised the futility
of higher rate of tax and in Finance Act 2007, withdrew
the higher levy except on soft drinks. In his Budget
speech 2007-08 the Finance Minister was candid, reason
enough for me to continue to admire him.
Para
159 of the budget speech
“The 20% tax rate imposed last year on nine categories of goods evoked
massive protest from trade. Almost all items in Kerala
used to be taxed at 22-24% under Sales Tax. It is this
tax rate that was reduced in the VAT system to 12.5%.
It was in these circumstances that I had argued that
a 20% tax rate was justifiable. I acknowledge that
higher tax rates would lead to trade diversion to Mahe and neighbouring States
once the protection of Entry Tax for the Kerala market
is gone. Government does not intend to collect taxes
at such high rates by weakening trade in the State.
Only minor variations in tax rates are possible with
other States; so, excepting for aerated soft drinks,
marble and granite, tax rate on all other items will
be reduced to 12.5%. I do not think that people will
go to other States to consume bottled soft drinks. A
separate compounding formula is proposed to be declared
for marble and granite. Dealer associations in other
items have promised in discussions to cooperate and
increase tax revenues in the coming year at least by
20%; I hope they will keep their promise.”
However,
In his concern to shore up revenues and to plug tax
evasion loopholes the Finance Minister, in Finance Act
2007,has proposed
levy of tax on MRP on the first seller in the state
where the TIN number of the buyer is not mentioned.
Section
40A of
the KVAT Act,2003 relating to Issuance of sale bill
by dealers has been amended by inserting sub section
(2) and (3) reading as follows:
"(2)
Where a dealer effects first taxable sale, he shall
furnish the name and address of the purchaser in the
sale bill/invoices, and where the sale is to a dealer,
the address shall include TIN or PIN, as the case may
be.
(3)
Where the TIN or PIN details are not furnished as specified
in sub-section (2), such dealer shall be liable for
payment of the tax on the Maximum Retail Price (MRP)
of such goods, where it is ascertainable.
Circular
39/2007 dated 24/08/2007 explain the intention
behind the amendment to Section 40A as only to bring
systemic pressure on all traders to write bills so as
to tap revenue up to the ultimate consumer.
The
Circular goes on to mandate that
In
case of sale to registered dealers, the invoice needs
to contain the TIN/PIN as well as the complete name
and address of the purchasing dealer
In case
of sale to unregistered dealers or those below minimum
threshold limit, the invoice needs to contain complete
name and address of the purchasing dealer.
The onus of proving that a purchasing dealer is not
liable to be registered under the Act will be on him,
which he can fulfill by giving a declaration to that
effect in the prescribed format
In case the purchasing dealer is untraceable at the
given address, the seller shall be liable to tax as
well as penalty under section 67 & 73 of the Kerala
VAT Act.
(click
to view Circular 39)
The
amendment to Section 40A mandating payment of VAT on
MRP besides being illegal is against the spirit of VAT
which is a tax on the value addition at each point in
the supply chain.
It
appears to me that the amendment to Section 40A is the
manifestation of the concern of the Finance Minister
to plug the tax evasion in the supply chain.
While
the solution lies in shoring up the administration to
ensure compliance, a more effective strategy would be
to enlist the cooperation of the second stage dealers
in the supply chain by persuasion. Even increasing the
turnover limit for composition could be an option.
It
may not be out of place to draw on the effectiveness
of international experience in ensuring compliance by
involving the stake holders in implementation. In Australia,
the GST compliance of suppliers of taxi service was
secured by engaging them in implementation and in Canada
compliance by fishing industry was improved by persuasion
and enforcement.
(click
to view extract from an OECD report)
I
do hope that the pragmatic Finance Minister
of Kerala Sri.T M Thomas Isaac would withdraw
the illegal amendment to Section 40A mandating payment
of VAT on MRP.
(Though
I always believe that any piece longer that about 800
words is taxing, I could not keep this piece short)
23/10/2007
