The benefits of VAT

BS OPINION

Given the government's record in bowing to pressure, few would have thought it would be able to stick to the Budget proposals for checking rampant tax evasion in the textiles sector.

Yet, despite months of agitation by powerloom owners, the government has forced powerlooms to register themselves with the excise authorities, in order to complete the Cenvat chain.

According to a report in this newspaper, 7,000 powerloom owners have already registered themselves with the excise department in major centres in Maharashtra, and another 13,000 are expected to follow suit soon.

While this is a small change compared to the total population of over 15 lakh powerlooms, it is a vital beginning, and the numbers are certain to swell now that the breakthrough has been made.

Till the Budget, powerloom units were not under the Cenvat regime, and fabric processors or garment units who bought fabric from them were allowed a 'deemed credit' to take care of the taxes paid at earlier stages of production (like spinning).

Since they got a tax credit anyway, neither the processors nor the garment units were particular about buying duty-paid goods. Under the new regime, there will be no 'deemed credit'.

So, if a readymade garment unit wants a rebate on the tax already paid, he has to get a tax-paid certificate from the process house, which in turn will have to get a similar certificate from the powerloom who will have to get it from the spinner.

Ergo, large-scale duty evasion (running into thousands of crores) will get reduced "" and this is exactly how a VAT system is supposed to work.

What is interesting is that, given the structure of the textile industry and where value addition takes place, the powerloom units won't have to pay tax anyway "" a point the government has made repeatedly.

In a typical example, if a powerloom unit bought polyester filament yarn worth Rs 100, he would be billed excise duty of Rs 27.60 and the yarn would cost Rs 127.60.

If, now, he levied Rs 30 as weaving charges, he would have to pay duty of Rs 15.76 (10 per cent of Rs 157.60). But, since the powerloom unit would get Cenvat credit of Rs 27.60 (for the tax paid on the yarn), he actually pays no fresh taxes.

That said, when the powerloom agitation was at its peak, the government made several concessions that could reduce the gains it can hope to make. One concession allows units to endorse their tax receipts to anyone.

Other concessions exempt the smaller powerloom units (typically those with 6 to 7 looms) from registration, and also allow several units to be registered at the same address, thereby encouraging people to show multiple units for tax purposes.

Since the 'exempt' units don't need to pay taxes, the Cenvat receipts meant for them are likely to be sold to other units that do have to pay taxes. To this extent, the tax effort will suffer.

Nevertheless, a beginning has been made; now one must wait to see the effects on tax revenue.