Vat encore!

Updated: Feb 23 2005, 05:30am hrs
Traders are presently opposing the introduction of the Value Added Tax (Vat) regime, primarily because they have not been explained the need for it.

Under a closed economy, we had high customs duty and there was no competition in the economy. With the opening of the economy, traders need to understand that they can ill-afford the cascade- type tax system, which hampers competition vis-a-vis multinationals. Vat should be considered as an opportunity to induce efficiency in their business.

The administrators, on their part, should keep in mind that under the present system of sales tax, only a fifth of the traders pay sales tax. Under the Vat regime, all dealers will come under the net and will also have to pay tax.

Therefore, procedures under the Vat regime have to be very simple. Submission of return, payment of tax and assessment have to be almost automatic. Special audit should be invoked only for a fraction of dealers, that too based on credible risk assessment. And should not exceed 10% of the trader population. Confidence- building measures should include minimising interaction between the tax department and traders.

There are some problems with the existing design of Vat that need to be rectified for the convenience of the taxpayer, as well as for having a rational design of the taxation structure. This relates to the exemption limit, as well as the composition of tax. Under the present system, dealers falling in the Rs 5-50 lakh range will not be able to have business dealing with larger traders. This requires to be addressed, else Vat will not succeed.

The writer is director, Foundation for Public Economics and Policy Research, Delhi