Reform Or Perish

Updated: Sep 25 2004, 05:30am hrs
The day of reckoning for VAT has ultimately dawned with the Empowerment Committee resolving the crucial issues to launch it from April 1, 2005. It is quite disturbing that 60% of value addition in India goes to the government through taxes. The cascading price and productive effect and total lack of buoyancy, elasticity and transparency mainly contribute to the tax muddle apart from the high tax evasion. Eighty per cent of the worlds population are now under a VAT regime covering 120 countries. Where the VAT is perfect, tax evasion is less than 10%. Where VAT is not implemented as in countries like India, evasion is more than 40%.

What is adopted now is limited to the sale of goods and not a holistic one as in other countries where VAT is levied on supply of goods and services. Such a lack of integration may lead to litigation. The ideal road map for VAT in India is the following:

Stage-I: State VAT speedy implementation and smooth transition, elimination of CST

Stage-II: National VAT Interstate set-offs of taxes, uniform documentary procedure.

Stage-III: All indirect taxes to be integrated both on goods and services. Limiting the states on VAT on sugar, textiles and tobacco with a ceiling rate of 4% without affecting the additional duty of excise on these items will make the system inadequate.

Tax barriers have fragmented the Indian market preventing the effective use of technology and the reduction in supply chain costs. The more the value addition in the country at different stages, the more will be the adverse impact of such irrational tax structure.

The author is former chief minister of Karnataka & ex-chairman, Tax Reforms and Revenue Reforms Commission, government of Karnataka