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Towards VAT
The states have agreed to move towards a value-added tax (VAT) system ofdomestic trade taxation. This may have something to do with the inevitabledecline in import tariffs, under the WTO regime, to international levels inthe not-too-distant future. (Easy low-cost imports pose a threat to domesticmanufacture: its retreat will cause a decline in tax revenues of thestates). In any case, it is encouraging that the states have agreed to havecommon four-slab floor rates: 0 per cent, 4 per cent, 8 per cent, and 12 percent. Besides, they will have two special floor rates: 1 per cent forbullion, precious stones, etc, and 20 per cent for petro-products, liquorand spirit. But these rates had already been accepted by finance ministersof the states. What is new is that on Tuesday the states agreed to have aunified VAT in place on April 1, 2002; so, before that date the states willmove to the new floor rates. This is undoubtedly an advance, especially inview of Maharashtra's unfortunate experience of flirting with VAT.The states have been coaxed by the Centre with the promise of a contingencyfund to compensate them for any fall in revenue under the new regime. TheCentre, on its part, has committed to introduce a single excise rate in thenext budget. The significance of floor rates is that the states will desist from ratewars to attract industry. But in the context of the slated rise in importcompetition, the states will have to be on their toes to quickly move goodsfrom the higher to a lower rate. They will have to do away with additionalsales tax, turnover tax, surcharges etc, and agree to zero the central salestax. In order to guard their revenues, they have rightly agreed to phase outsales tax incentives to industry. Note that the states will have tointroduce rebating taxes on input, capital goods and on previous stages ofmanufacture, if they are to seriously move towards VAT. This will requirestreamlining the tax administration (along with computerisation) in thestates and at the Centre; shortcomings will result in excessive refunds (asseen from the Centre's experience under Modvat). On these counts, notime-bound programme has been announced in the November-16 agreement of theCentre with the states. It is one thing to commit a date, but quite another to a create aglitch-free system by April 2002. Besides, to ensure rising revenues tostates under VAT, they will have to be given the power to tax services. Tothus widen their tax base, it will be necessary to put through aconstitutional amendment. The deadline seems too close. Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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