Roadblocks To VAT

Updated: Aug 20 2004, 05:30am hrs
On paper, one more roadblock en route to a complete value added tax (VAT) has been cleared with the states agreeing on VAT rates for close to 500 items.

While about 250 essential commodities and manufacturing inputs are to attract 4% VAT, the remaining 217 items will attract tax at 12.5%.

The final list of items and rates will reportedly have to await a formal declaration by the empowered committee of state finance ministers. And there lies the crux of the problem as well the reason for our scepticism.

For while in theory one more roadblock has been cleared, in practice we are, quite possibly, no nearer to making it to the April 2005 deadline than earlier.

The reason is that each state has its own ideas about the items it wants included in the essential category.

This is to some extent understandable, given the wide diversity in development levels among different states.

But unless there is a greater willingness to find common ground so that the number of items can be pruned, we will not get very far.

We will end up with a final list of items that is so unwieldy that it defeats the very essence of a VAT regime. It may be recalled that this is precisely where progress was stalled last time round as well.

The states could just not come to an agreement on a common but brief list of items that would qualify to be classified as essential.

Remember, one of the main attractions of VAT, indeed its USP, is its simplicity. As a destination-based consumption tax, VAT does away with the cascading inherent in todays system where tax is paid on tax.

More important, by substituting just three or four rates for todays multitude of rates based on classification of items, it reduces the scope for both discretionary decisions as well as for litigation over classification.

But what is critical to the success of VAT is to keep the list of exempt items short and simple. Unfortunately, that can never happen as long as the states keep haggling over details.

It is not enough that most, if not all of them, are in broad agreement about the need to move to a comprehensive VAT, covering both goods and services. Or that there is no dispute about floor rates either.

They need to realise that such a cataclysmic shift in regimes calls for much more. It calls for much greater willingness to find more commonality.

Unfortunately, that is easier said than done. There is nothing to indicate that things will be any easier now. And if that is the case, the shift to a VAT may well be a case of jumping from the frying pan into the fire.