Make haste slowly

The new deadline of April 1, 2005, to introduce the state level Value Added Tax (VAT) regime is good news that may not last very long. Because the new deadline, which is unlikely to be met, is a good example of how in a democratic body consensus can be artificially manufactured.

In this case, as with earlier VAT deadlines, it has been obtained by a process in which haste and the desire to announce a date have prevailed over detailed deliberation and clarity.

The devil, as always, lies in the detail. The new consensus has been obtained by ignoring the detail and hoping that the devil will not surface.

The tack adopted by P Chidambaram is that, unlike in the past, the Centre is not looking for complete convergence. Instead, he wants only a broad consensus in the VAT laws across all states.

This is a good move to get a consensus going, but the danger is that states could start introducing clauses to suit their convenience "" be it related to exemption lists or turnover limits. The deviations could become serious enough to violate the spirit of VAT itself.

Equally worrying is the state of preparedness in the different states. In setting the new deadline for introduction of the VAT system, the consensus was acquiesced to not so much because everyone accepts it, but because everyone wants to follow his neighbouring states.

Even after three years, during which the empowered committee has been deliberating the move to an indisputably better tax regime, significant issues remain unresolved.

For example, the basic pre-requisite "" consistent commodity classification "" has not been finalised in depth yet. This has resulted in some serious anomalies, such as essential life saving drugs and agricultural implements being taxed at the highest rate, something that is clearly unacceptable.

Similarly, what precisely constitutes capital goods inputs on which set-off will be granted, is still unclear to many states.

Add to this the fact that the commodities which currently attract additional excise duty "" sugar, tobacco and textiles "" will not fit in the VAT for some states. So at least for the first year you have a messy picture which resembles more the sales tax set-up than a good VAT system.

In most cases, there has been no training of the staff, and education of traders and business. Except one state, no one has a VAT software package up and running, and computerisation is still not complete.

All this can be overcome if VAT implementation is pursued in a mission mode. But the devil is likely to rear its head in August when the compensation formula is going to be worked out by the Centre.

Even as all states (with the exception of Uttar Pradesh) are going ahead, there is no clarity on how the Centre will compensate for their revenue loss, both in terms of the principle and the level of compensation. How will inter-state compensation take place?

Also, if states manage their transition well and don't see a revenue loss, why should they be penalised for making a smooth transition? There has to be some incentive for good performance, lest perverse incentives ruin good implementation.