Indiscretion On VAT

Updated: Oct 25 2002, 05:30am hrs
The Value Added Tax (VAT) regime is due for introduction from April 2003, assuming that systemic problems in some states dont result in further postponements. Apex chambers like the Confederation of Indian Industry (CII) and Associated Chambers of Commerce and Industry of India (Assocham) have recently made presentations before the Empowered Committee of State Finance Ministers. The former rightly argues that VAT requires the complete elimination of all other indirect taxes, including surcharge, luxury tax, turnover tax, entry tax, octroi and other taxes on sale or movement. Given the fiscal pressures at the state and local-body levels, it is doubtful that this wish will materialise. Hence, what the union finance ministry dubs as VAT is a euphemism for a unified state-level sales tax and both CII and Assocham have stressed upon harmonised classification and documentation procedures as prerequisites. Nor do newspaper reports indicate industry positions on the Central Sales Tax: This needs scrapping and a reduction to 2 per cent in 2003, with eventual and open-ended reduction to zero per cent, is neither here nor there. Fiscal pressures have forced the states to link VAT with service sector taxation and industry seems to have accepted this logic.

This is more than strange. Independent of the presumed link with VAT, service sector taxation is necessary to widen the tax base and boost the tax/gross domestic product (GDP) ratio. If this sector accounts for 50 per cent of GDP, why shouldnt services pay indirect taxes However, both the CII and Assocham have valid points on service sector taxation. The CII argues that services must be integrated into a VAT framework and the present practice of turnover taxes is antithetical to VAT principles and has cost cascading effects. Assocham argues that the present practice of selecting certain services, with presumed further allocation of sectors between the centre and states, is arbitrary and discretionary. Other than harmonisation of rates, classification and set-off mechanisms of service sector taxation across the states, all services should be under the ambit of taxation, barring a few that might be uniformly exempted across the states. The idea of a dual VAT presumably is central taxation up to the wholesale level and above a certain threshold, with state-level taxation up to the retail level and above a certain threshold, with appropriate credits for taxes paid at earlier stages of the distribution chain. The finance ministry may argue that implementation is an issue and selectivity is necessary because certain service sectors are more amenable to taxation than others. This is indeed perverse logic and an attempt to overhaul indirect taxation shouldnt begin on irrational principles. Who has demonstrated that taxation of dry cleaners is easier than taxing accountants or doctors In a similar vein, the idea that some services are national and others are state-level is bizarre. Discretion has been the bane of Indias indirect taxation. Any reform must begin with the premise that special and differential treatment is inefficient and undesirable.