State cells to monitor VAT

All states have agreed to set up individual cells to monitor value-added tax (VAT) credits and keep a check on revenue and prices, Parthsarthi Shome, economic advisor to the finance minister, said today.

Addressing a conference on VAT, which will come into effect from April 1, Shome said the cells would help ensure that there was no undue increase in prices under VAT since the tax was revenue neutral.

Shome said international experiences, like that of South Africa, had shown that prices, in fact, fell after introduction of VAT. Shome also made out a case for having strict penal provisions under the new regime so that the entire trade was not made to suffer on account of a few.

"While the white paper had made it clear that the penal provisions will not be more draconian than under sales tax, several countries have extremely strict provisions under VAT," he said.

I know of countries where a shop was shut for a week because the shop-owner did not file the VAT returns correctly," he said adding that some other countries even had provisions to jail traders.

Shome pointed out that the VAT rules formulated by the Empowered Committee was in many ways superior to the rules in other federal structures like Brazil, European Union and Canada.

"While we are preparing for an origin-based VAT from April 1, we should quickly move towards destination-based VAT," he said.

While the empowered committee had agreed to phase out the Central sales tax (CST) from the next fiscal, Shome said the CST should not be phased out until a proper inter-state information network was put in place so that details of traders who trade in 3-4 states can be obtained. He said the empowered committee had already set up a sub-committee to set up the information network.

The present VAT system, Shome said, left a lot of traders out of the net as only those whose turnover was more than Rs 5 lakh were required to register under VAT.

"We need to get more traders under VAT and traders would come voluntarily once they know about the credit mechanism under VAT," he said.

On certain items like textiles, sugar and tobacco being kept under the Additional Excise Duty, Shome said that some smaller states were against abolition of AED since it was a major source of revenue generation.