|
However,
this is only the beginning of the long and arduous road to
the final destination. Indeed, the tax system reform
involving the Centre and 35 states and Union Territories
entails significant compromises and it is important to
ensure that the process does not compromise the
fundamentals of a sound tax system and federal principles.
Although the dual VAT does not completely unify the tax
structure and administration, this is perhaps the best
feasible solution in the context of preserving the
states’ fiscal autonomy while harmonising the tax
system. However, there are questions relating to the
structure of the tax, the base and the rates, the
administrative system and transitional issues.
Clearly,
it is necessary to have the tax rate low, which means that
the tax base must be broad. The prevailing statutory
CENVAT rate of 16 per cent and 12.5 per cent state VAT
does not give any indication on the revenue-neutral rate (RNR)
due to the narrow coverage and multiple tax rates. The
report of the Kelkar task force recommended the combined
rate of 20 per cent but that was not worked out in any
scientific manner.
While
it is important to design the tax to be revenue-neutral,
it is also important to realise that levying the tax at a
high rate would only reduce compliance. In 2007-08, the
estimated combined revenue from domestic indirect taxes
from the Centre and states was 9.5 per cent of GDP or 11.6
per cent of NNP. By assuming the savings rate at 33 per
cent, the combined burden of central and state domestic
indirect taxes as a ratio of total consumption can be
estimated at about 17 per cent. As all consumption,
particularly government consumption, cannot be taxed, the
RNR even with a comprehensive base will have to be higher
than this figure. It is necessary to undertake detailed
studies to estimate the RNR and hopefully, the EC will
undertake them before a final decision is taken.
In
any case, from the viewpoint of tax compliance, it would
be inadvisable to have the combined burden of the tax more
than 15 per cent. In fact, Thailand levied VAT at 7 per
cent in 1992 even as the estimated RNR was 10 per cent and
yet recovered the revenues besides sharply increasing the
revenue productivity of income tax. Indeed, it is possible
to levy the tax even at a lower rate to realise the
present revenues. This would require the levy of separate
excise on petroleum products (carbon tax) and on tobacco
products and alcohol (sin taxes). In addition, it may be
necessary to levy a separate excise on luxury items of
consumption to keep the general VAT rate low.
Surely,
the tax base must be comprehensive to include all goods
and services except unprocessed food items and a few
services as recommended by the service tax committee
chaired by me in 2001. The tax should be levied at one
rate by the Centre and another by the states. Indeed the
states should have the autonomy to decide the rate, but to
avoid tax competition the floor rate may be stipulated.
Experience has shown that multiple rates designed for
equity do not really serve the objective, but only add to
administrative complexity and to increase the compliance
cost. There are sectors difficult to tax, such as the
financial sector and housing and a clear decision on the
way to include them in the tax base is necessary.
Determining
the base and rates is only one of the several important
decisions to be taken. The transition to VAT involves
significant reforms. At the central level the important
reforms include unification of central CENVAT rates
including the conversion of specific into ad valorem,
extending service tax to all services with a small
exempted list to convert CENVAT into a manufacturing stage
VAT on goods and services as was recommended by the
service tax committee in 2001. Hopefully, the forthcoming
budget will take measures at least to unify the excise
rates into one and extend the base of the service tax to
make it a general tax from its present selective character
and unify the rates of taxation on goods and services.
Extending the service tax base would enable the Centre to
reduce the CENVAT rate as well. Indeed, on petroleum and
tobacco products, there can be a separate sumptuary
excise. Of course, enabling the Centre to levy retail
stage VAT can be done only after the Constitutional
amendment.
The
reforms at the state-level relate to the phasing out of
central sales tax and the levy of service taxation. On the
former, the EC has already decided to make the tax
destination-based by transferring the tax collected on
goods sold on inter-state sale to the destination state.
In order to levy the GST at the state level it is
important to give concurrent service tax powers to the
states and given the difficulties in determining the place
of performance in the case of services with inter-state
spread, it would be necessary to agree upon the revenue
accrual arrangements based on “place of supply rules”
as in Canada.
The
transition to the VAT regime requires considerable
preparation and the EC will do well to set things in
motion without any loss of time. There are considerable
changes to be made in administrative organisation,
legislation, returns, assessment, computerisation and
information system, capacity building, adjudication,
taxpayer services and transitional issues. It is extremely
important to institute an effective mechanism to enforce
decisions. The EC must be commended for leading the reform
so far, but its record at enforcing the decisions taken
has not been impressive. As the dual VAT is levied there
will be a need for a permanent mechanism to resolve
inter-state and Centre-state disputes.
Source
: Business Standard - Mumbai, Maharashtra, India, dated
04/12/2007
|
