Sukumar Mukhopadhyay: Finishing off VAT

It has now officially been made public that value-added tax (VAT) tariff would be patterned on the classification based on the Harmonised System of Nomenclature (HSN), also known as the Brussels Trade Nomenclature (BTN). This is bad news for the simple reason that it is the best way to make the VAT tariff unduly elaborate and complicated.

It is not clearly known now what will the be complete coverage of HSN over the different "lists" attracting rates of zero, one, four and 12.5 per cent. As it is, all the states have not written the lists of exemptions in the same way.

While the West Bengal and Punjab lists do not have a separate category for 12.5 per cent (so that all residual goods will attract 12.5 per cent), in the case of some other states such as Sikkim, a complete list of goods attracting 12.5 per cent has been given and, in the end, there is an entry for all other goods not mentioned anywhere. In any case, it is very likely that the HSN classification would be required to be written for all goods in all the lists.

HSN has 98 chapters in customs, which comes to 730 pages of a standard textbook. It has got elaborate chapter notes, section notes, exclusions, inclusions and definitions all over the tariff. Similarly, there are 87 chapters in central excise spread over 687 pages. The customs tariff has eight digits and Central Excise Tariff has six digits.

Taking customs first, the chemical chapters are spread over nearly 48 pages, with divisions and subdivisions. The language is highly technical, and has, for instance, references such as disphosphorus pentaoxide, phosphoric acid, polyphosphoric acids, whether or not chemically defined, ethers, ether-alcohols, ether-phenols, ether-alcoholphenols, alcohol peroxides, either peroxides, ketone peroxides, and their halogenated, sulphonated, nitrated or nitrosated derivatives.

The chapter dealing with medicines described as pharmaceutical products has nine pages having eight-digits sub-divisions, and has about 400 items. The chapter on machinery has descriptions spreading over 70 pages.

A typical entry relating to machine tools will have to describe the items in technical terms such as drilling machines, numerically controlled or otherwise, bench and pillar, horizontal, vertical, universal, ram type and so on.

Even a dish-washing machine has nine separate entries with eight digits bearing descriptions such as: household type, other types, for cleaning or drying bottles or other containers, and numerous others. A machinery trader will have to write all these descriptions correctly with eight digits.

Once there is a slight mistake in writing, that invoice writing can be objected to by the officers checking, scrutinising or auditing the entries. Even simple things such as chocolates and biscuits, or wafers containing chocolate have got two full chapters to their credit with eight-digits subdivision having descriptions such as pasta containing eggs and not containing eggs, wafers and communal wafers, biscuits containing chocolate and coated with chocolate, biscuits not otherwise specified, extruded or expanded products, savoury or salted.

Such classification problems will arise, say, if the biscuits or cakes are savoury or salted "" they will then fall under 1905 90 30, and if not, then it under 1905 90 90 as "others". There are more than hundred judicial decisions of tribunal, high courts and Supreme Court on chocolate-related issues.

If examples of other countries are any guide, out of 141 countries having VAT in the world, there is single rate in 76 countries. Obviously, there is no question of HSN there. The notable countries having single rates are Australia, Cambodia, Canada, Chile, Japan, Nepal, Peru, South Africa, Sri Lanka, Taiwan, Thailand, Uganda, Denmark, and Ireland and the UK. Even in the European Union, HSN has not been established.

HSN was originally designed for international trade where the transactions are between big manufacturers and traders. Internal trade is a different kettle of fish. The internal trade in India mostly has invoices carrying large number of items.

In a typical retail shop, the invoice carries hundred descriptions of goods such as powder, snow, soap, fountain pen, ball-point pen, lipstick, biscuits of different type, some across the counter medicines, and so on.

As it is, the traders are under great strain to write all these existing descriptions. Adding further burden of HSN classification on them will be like putting the last straw on the camel's back.

By giving too many exemptions to industrial raw materials and so on in two huge lists, the states have laid the foundation for controversies regarding their classifications. The solution is not in introducing HSN but in abolishing these exemptions.

If at all HSN has to be used, it can be so done as a reference book just like a dictionary or a technical book, in case there is a controversy between the application of a 4 per cent or 12.5 per cent for a particular item.

But wholesale harmonisation on the pattern of HSN will bring wholesale disaster for the trade. The trade after initial protest had got down into the job of accepting VAT. Now this provocation of introduction of HSN will again bring about rebound action from them. And for once it will be wholly justified.