Karnataka is the only state that has four rate categories. A few oth-er states have attempted to reduce the rate categories but are still far away from the desired goal. As regards industrial incentives, nothing has been done by any state.
As regards VAT, some effort has been made by states like Andhra Pradesh, Kerala and Maharashtra. However, the haphazard way in which it is being implemented has given us two approaches. The first could be termed as the commodity approach wherein a few commodities are singled out. This implies that some dealers pay VAT whereas the others pay sales tax. This also suggests those dealing in a large number of commodities would have recourse to sales tax as well as VAT. Ironically, this system has neither provided for set-off for the tax paid on inputs nor cared to follow the other pre-requisites of VAT like reduction in tax rates. The second approach followed in Maharasthra follows the system wherein all dealers above a turnover limit fall under the purview of VAT.
No other state has attempted to reform the structure or adopt VAT in any significant way. In this context, it is important to note that the finance ministers of the seven northern states Delhi, Haryana, Himachal Pradesh, Jammu & Kashmir, Punjab, Rajasthan, UP and one Union territory viz. Chandigarh, recently met to discuss the issue of harmonisation of sales tax in the region. They also decided to introduce measures to pave way for the introduction of VAT.
While the significance of medium-term measures cannot be undermined, it should be recognised that without attempting short-term measures, the former cannot be successfully implemented. Andhra and Kerala illustrate the damage caused by such steps.
Therefore, as a necessity, the states have to first reduce the number of rates to four in the short run. The committee of state finance ministers has proposed a list of items that should fall under different rate slabs. Hence, the states would not be required to do much homework. Also, the number of exemptions under the sales tax system has to be curtailed. More importantly, as agreed upon by the state finance ministers, there should be no further industrial incentives. The finance ministers of the northern states have decided to unify the tax rates on 10 high-cost items. One wonders as to why they have singled out 10 such items. What would happen to other commodities and the rate structure in general?
Although one would expect all the states to eventually have a harmonised sales tax system, yet it is encouraging to note that the finance ministers of the northern states have agreed to initiate preparations for introduction of VAT. This is a very important decision. Our experience of introducing VAT without preparations be it Modvat or VAT indicates that such preparations are of paramount importance.
Experiences of countries which have gone in for VAT, as shown in a study titled Principles and Practices of Value Added Tax: Lessons for Developing Coun-tries, also corroborate this. For example, Argentina, Korea and Mexico spent adequate time and money on a publicity campaign aimed at both taxpayers and consumers. Similarly, Korea took the help of the chambers of commerce and industry, newspapers, TV and radio on the need to adopt VAT. Taiwan also assiduously campaigned to educate public in regard to VAT.
It is time we too started thinking along these lines. The Andhra experience shows that the introduction of VAT met with tough resistance from the trade as well as manufacturers. The government did not make any preparations (not even the tax return) prior to the introduction of VAT. The net result is not encouraging. In Maharashtra, some campaigning in the form of meetings with the chambers of commerce and industry was attempted, and it did help the department sort out dealers problems.
Although we have been talking of sales tax reforms for the past six years, practically nothing has been accomplished so far. The experiences of Andhra Pradesh and Kerala who adopted a commodity approach to VAT, shows that it has generated protests and resistance from dealers. The experience of Korea, Taiwan, Argentina etc also suggests that we must keep the necessary lead time and attempt requisite publicity before VAT is implemented. At home, the same is corroborated from the experience of Maharashtra that has introduced VAT through a threshold approach after adoption of short-term reforms related to rationalisation of structure (viz. reduction in the number of rates as well as exemptions). It is remarkable to note that the efforts of the department in campaigning for VAT has generated demand for its extension to those not falling under its purview. Also, it is noteworthy that Madhya Pradesh has already started holding workshops and lectures on the issue. One hopes that the states will learn from the
experiences at home and abroad and to do the necessary groundwork before introducing VAT.
(The author is a professor at the National Institute of Public Finance and Policy, New Delhi)
