Notwithstanding the division of states over the issue of introduction of VAT, it is important that they must ensure its smooth introduction. To ensure its acceptability, taxpayers need some time to understand the implications of the new tax.
States have to spend reasonable time on information campaign. In its absence, misconception and misinformation about VAT has resulted in bandhs and strikes.
It is important that taxpayer understands that in a close economy with very high rate of custom duty with no external competition for manufacturers or traders, the existing sales tax could have been continued.
In a globalised economy the country cannot afford to have the existing sales tax, which tends to raise consumer prices by an amount higher than what accrues to the exchequer due to the phenomenon of cascading effect.
VAT must be looked upon by taxpayer as an opportunity to gain competitive advantage and to improve business operations. He should also be aware that whatever be the tax rate, the element of tax does not enter into the system of costs and pricing. Hence, it is not inflationary. As pointed out by the Union finance minister, lack of timely preparation on the part of states is an important obstruction to the introduction of VAT. Most states have so far not brought out their laws. Those who have done so, have many aberrations and anomalies.
It is important that the states bring out tax laws and procedures well in time and seek comments from the taxpayers before these are implemented. The procedures should be so framed that the interaction of the taxpayers with tax department is minimized.
One of the important issues in the introduction of VAT relates to tax rate, as pointed out by the government of NCT of Delhi. The issue relates to the high rate of tax and deserves serious consideration. It being a general rate applicable to all commodities, it is certainly very high. Prior to November 1999, sales tax rates in Delhi were very low. Delhi had the lowest rates among its neighbouring states.
In many of the eastern states the tax was not even in existence. Under these circumstances, the consumers would not be adversely affected, if the general rate is retained at the level of 8 per cent. The states wanting to have higher rate, could always do so. Floor rates, when seen in the context of coexisting CST, is much higher in the consuming states as compared to the producing states. This not only affects the poor (consuming) states but also causes diversion of trade from the poor states to the rich states. Whereas the idea of floor rate was to stop rate war, it did not envisage diversion of trade from the poor states to the rich states. Under the new regime of floor rates with CST, the consuming states are in fact paying higher floor rate. This distortion can be corrected by allowing importing states their autonomy of having floor rates as per their taxable capacity and having floor rate as GST minus CST. Also, it is important to note that CST and VAT do not go hand in hand. The CST must be reduced to zero to make India a unified market.
Finally, empowered committee in its meeting held last week took up the case of small dealers and announced that dealers in small turnover would pay a lump sum tax. This is a step in the right direction. However, these dealers cannot be kept out of VAT. States must understand that small dealers follow composition scheme because their cost of compliance is high. They must issue cash memo and be part of the VAT regime. This would enable their purchasers to claim input credit. These issues have to be properly incorporated in to the laws being framed by the states.
The author is Director of the Foundation for Public Economics and Policy Research (FPEPR), Delhi-110052. He also served as member-secretary, empowered committee.