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Well,
the implementation of VAT has been deferred by 6 months to
1-10-2002. The final and formal decision is expected to be
announced in the scheduled meeting of State Finance Ministers
on the 23rd January 2002. Considering that there was more
confusion than clarity on the provision of the proposed VAT
Acts of different States, the decision to defer VAT is the
right decision. The pressure on the States to introduce VAT by
1-4-2002 has at least helped in focusing on the core issues
and has more or less narrowed down the problem areas in the
transition to VAT.
Centre
is responsible for the Postponement
Looking
back, Who is responsible for the failure to meet the deadline?
Are
the States to be blamed for not making sufficient
preparations? Or is the Centre responsible?
Though
only few States were really ready for 1-4-2002, I feel that
those States that were ready were let down by the Central
Government which set an Agenda for the States but failed to
have an agenda for itself to facilitate the transition to VAT.
Designing
an acceptable form of VAT in a federal structure with Central
levies and State levies is no mean task. But it is not a
difficult task if only the Central Government is earnest. It
had been highlighted in many seminars and interactions with
the Central Government that unless CST reforms are effected
the switchover to VAT would be impossible. Though we were
favoured periodically with press releases that CST reforms are
under consideration, the Centre failed to initiate any action.
Compensating
Revenue loss to States will be a major issue
I
do not believe that the States would agree to introduce VAT in
the face of a fall in revenue unless the Central Government
assures an acceptable proposal for compensation of possible
revenue loss. The following two reasons were cited for the
postponement of implementation of VAT.
-
Lack
of preparedness and the recessionary trends which have
adversely impacted their revenues have been cited as the
major reasons for skipping the deadline. (The Hindu
Business Line dated 08-01-2002)
-
How
revenue losses incurred by States due to switchover to VAT
would be compensated is also yet to be concretised.
Sources said the States want all theses issues to be
settled and legally concretised, before they can formalise
their VAT Acts and go ahead with implementation. (Economic
Times dated 08-01-2001)
It
has been reported that a floor rate of 10% and a maximum of
12.5% have been agreed to as the Revenue Neutral Rate by all
the States (if this rate is Revenue Neutral, the States should
not face any revenue loss! I think one should call this rate
as a General Rate rather than RNR, as this rate may not be the
Revenue Neutral Rate, if the claim of revenue loss by the
States is true)
The
revenue loss to States is likely to a major bottleneck. One of
the avenues proposed is the levy of service tax by the States.
A list of 51 services has been identified for levy by the
States. (click
to view list) Most of the services listed are in
the unorganised sector and collection would be a Herculean
task.
The
ideal course would be to let the States choose the services to
levy tax. The centre should publish a list of services
reserved for itself and a negative list of services not to be
taxed. The States should be allowed to decide for themselves
the services to be taxed depending upon the local political
and economic situation.
Unless
the centre agrees to compensate the revenue loss VAT may not
happen at all.
Design
a National Sales Tax VAT Act
A
study of the draft VAT Acts published so far reveals that
there is no uniformity in the different draft Acts on issues
like taxation of deemed sales, definitions, input credit etc.
What
will happen is that you will have 28 (or as many States that
switchover to VAT) VAT Acts replacing the existing Sales Tax
Acts. This will definitely be not a reform in the right
direction. The need is for a central VAT Act on the lines of
the Central Sales Tax Act or the Motor Vehicles Act. The broad
principles and policies should be incorporated in the National
VAT Act with powers to the State to define the schedules,
exemptions, Special Additional Tax, etc and administrative
provisions. Having a National VAT Act is definitely not an
abrogation of the powers of the State as the powers of the
State can be exercised by the State Rules.
Since
it has been decided to permit levy of service tax by the
States, the need to amend the constitution to permit levy of
service tax by the State can be avoided by incorporating the
service tax provisions also in the National Sales Tax VAT Act.
The levy of service tax by the State as well as the Centre
should be incorporated in this Act.
Minor
indirect levy by the States like entry tax etc. should be
dispensed with. If the levy of entry tax if insist upon by the
State to be continued on revenue consideration necessary
provisions may be made in the National Sales Tax VAT Act.
With
a National VAT Act uniformity can be achieve on some of the
following major issues.
-
Uniform
definition of "dealer", "sales",
"turnover" etc.
-
Uniform
rates of taxes with powers to State to levy non vatable
Special Additional Tax.
-
Uniform
dealer registration or identification numbers based on the
income tax PAN as is now being done for Central Excise and
Service Tax. This will help better audit trial
-
Uniform
threshold limits at least with reference to interstate
trade.
-
Common
commodity classification for Sales Tax, Customs and
Excise.
-
Uniform
book keeping requirements, self assessment limits etc.
-
Uniform
format of invoices integrating the requirements under the
Excise Act and Sales Tax Act.
-
Uniform
treatment of fines and penalties for offences.
-
Uniform
documentation for movement of goods
-
Uniform
treatment of concessions and deferral schemes of States
that are similar with powers to States to decide on
schemes that are peculiar to the particular State.
-
Uniformity
in the form of return with should cover both taxes on
goods and services.
-
Uniform
provisions for input tax credit, set off etc.,
The
VAT Act should give input tax credit of tax on goods and
services against the output tax of both goods and services.
Permanent
Consultative Body of State administrators for VAT
A
National VAT Act is possible only if a permanent institution
with representation for all the States is setup.
Let
the Empowered Committee of State Finance Ministers be the
final policy making body.
The
tasks of designing the National VAT Act should be entrusted to
a body of State Tax administrators of the rank of Joint/Deputy
Commissioners. The State should be required to commit the same
official for a minimum term of at least 3 years to ensure
continuity.
The
committee should also have representation of Trade Bodies, Tax
Lawyers and also Chartered Accountants for proper guidance on
book keeping requirements.
Central
Sales Tax Reforms
Much
has already been written on the aspects of the Central Sales
Tax/Additional Excise Duty that needs to be amended. Some of
the amendments expected are
-
Goods
under AED to be brought under VAT (Textiles, Sugars and
Tobacco)
-
Deletion
of the concept of declared goods.
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Levy
of tax on imports to protect local industry.
-
Deletion
of Section 5(3) of the CST Act of deeming the sale
penultimate to export as export sales so as to treat only
the actual export as zero rated sales.
-
Amendment
to the definition of sales to include deemed sales
-
Form-C
and Form-F to be made mandatory.
Phasing
out of Central Sales Tax and other levies like Entry Tax
It
had been proposed that the CST Rate would be initially reduced
to 3% and gradually to 0% and that the Centre would compensate
the States for the loss on account of the 1% reduction in CST.
The compensation was estimated at around Rs.2,500/- crores.
With the present weak fiscal position of the centre, the
reduction to 3% will not happen now.
The
Centre by levying service tax on more services should earmark
funds to compensate the States for the gradual phasing out of
CST.
Considering
the preoccupation of the Government with political and other
national security issues I feel that the present occasion of
amending the CST Act should be used to also incorporate the
proposed reduction in the CST rate. The necessary amendment
and time frame for the phased reduction to 0% should be
incorporated in the CST Act so that this reform may not be
affected in the future by any political change of guard at the
centre or by the realignment of priorities of the Centre.
Let
us plan transition properly
Though
VAT is conceptually ideal, the VAT that is planned for us is
only a multi point levy with selective offset of tax paid on
inputs. Continuing with CST and not giving input tax credit on
inter state purchase will never make India a common market.
An
ideal VAT is a single tax system. Though integration of Excise
duty also in a single VAT would be ideal, expecting that to
happen in the near future would be wishful thinking.
The
postponement should be used as an opportunity to plan the
transition properly. The deadline of 31-10-2002 need not be
sacrosanct. What is sacrosanct is the proper and effective
design of the VAT structure so as to facilitate the
integration of tax on Goods and Services levied by both the
Centre and the State (sales tax and entry tax) into a Single
VAT.
VAT
Wish List
Here
is a wish list
of the entities on the transition to VAT. I
have presented first the wish list of the consumer who after
all is the person who actually pays the tax and has been a
mute spectator to the happenings.
Click To View Wish
List
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