A K Bhattacharya: Why CAS failed and VAT will succeed

NEW DELHI DIARY

The similarities may not be too obvious. But take a closer look and you will recognise several common issues they raised and the challenges they threw up for the government.

Yes, we are talking about the Conditional Access System (CAS) for the digital transmission of programmes beamed by different television channels and the value-added tax (VAT) regime to replace the various state levies on sales of commodities and services.

Both CAS and VAT represented a major change being initiated by the Centre to be implemented in states. In a quasi-federal structure like ours, changes initiated by the Centre raise complex implementation issues, particularly when the new system is to be put in place in states ruled by different political parties.

Moreover, both CAS and VAT meant a transition from one system to another that was completely different. The existing systems had their defects, but the consumers and the intermediaries were used to them and they did not feel any immediate pressing need for a change. In any case, no change is without pain and the benefits from a change are recognised only after its implementation.

Which is why there were a lot of protests by traders and intermediaries against the implementation of both CAS and VAT. The trade felt that it was inconvenienced in the name of reforms and what was being touted as a better system.

The resistance to the new system also stemmed from the fact that the existing regime was less transparent and foolproof, allowing the trade to make an extra buck or two by under-reporting. All these benefits would have disappeared with the new system, the trade feared.

There was yet another common factor, which was perhaps the most crucial of them all. The introduction of both CAS and VAT was to have resulted in an increase in consumer costs. Households used to home entertainment through cable television networks feared their monthly subscription fees would go up after some time, if not immediately.

In addition, they were not comfortable with the idea of shelling out a few thousands of rupees extra to purchase a set-top box. And this was not a one-time expenditure since anyone deciding to move house from one part of the city to another or to another city altogether was expected to buy a new set-top box.

And VAT too resulted in the increase in prices of a host of commodities as the sales tax rate on many items went up. It is equally true that prices of several items came down because of the reduction in the VAT rate for essential goods.

But consumers are prone to talking more about the hike in prices and ignoring the benefits of a price reduction, just as CAS households refused to recognise that their monthly subscription fees were to have come down in many cases.

But in spite of such similar issues and concerns, CAS failed while VAT has succeeded. CAS was to have been introduced from September 2003 in all the four metropolitan cities""Mumbai, Delhi, Kolkata, and Chennai. It could be started only in Chennai, where it is still operational but on the verge of being discontinued. And nobody is talking about CAS in Mumbai, Delhi, and Kolkata.

In sharp contrast, VAT has been introduced in as many as 21 states. Among the big ones, only the states ruled by the Bharatiya Janata Party and Uttar Pradesh have refused to implement VAT. But going by the initial feedback, VAT is here to stay in spite of the continuing protests by the trade.

In fact, the BJP-ruled states may also soon opt for VAT. Don't forget that companies offering special VAT software solutions have been reporting brisk sales of their programmes even in states like Rajasthan, Gujarat, and Madhya Pradesh.

What it means is that the industry and trade in those states also recognise that it is only a matter of time before VAT is introduced there also and they better remain prepared for its introduction.

So, what went wrong with the implementation of CAS ? Of course, the biggest problem with CAS was the growing realisation that it was not the most appropriate technological switch-over.

Experts argued that households should be encouraged to switch over from cable connections to the direct-to-home (DTH) mode of receiving television channels, instead of dumping them with an outdated CAS. In sharp contrast, there was no such debate over VAT, which was universally acknowledged to be the most transparent and efficient system of taxation on sales of goods and services.

Secondly, intermediaries and vendors played a far more constructive role in the implementation of VAT than how the multi-system operators (MSO), local cable connection companies and broadcasters responded to CAS. Traders opposed VAT, but there were no infrastructural constraints and the industry and trade could implement it because the software solutions and the new VAT laws were all in place.

In the case of CAS, however, it became obvious that the MSOs and the local cable connection companies were trying to pass on the set-top-box costs to the consumers and did not see much benefit for themselves. The broadcasters were the only ones who appeared to benefit. The government cut customs duty on set-top boxes to reduce their prices, but there was no attempt to bring all the intermediaries together and approach the CAS challenge in a cohesive manner.

The message that the government conveyed by agreeing to a phased introduction of CAS was that the political leadership was weak and not united in its implementation. In the case of VAT also, there were half a dozen postponements.

But the political leadership never betrayed any lack of conviction about the need for the change in the taxation system. An empowered committee with representatives from different states was set up to enforce the implementation of VAT.

The committee took some years, but it completed the much-needed groundwork before VAT could be implemented. No such preparatory groundwork was done in respect of CAS. Little wonder that CAS failed and VAT looks certain to succeed.