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Implementation of VAT absolutely essential: CII

Shobha Warrier in Madras

With the opening up of the Indian economy in 1991, with global players entering India and with cheap imports from other countries flooding Indian market, it became absolutely essential for India to reform its heterogeneous number of tax rates and commodity classifications across the country. The fiscal reforms were initiated on the basis of the report submitted by the tax reforms committee in the year 1991.

The first generation fiscal reforms tackled taxes at the central level. In the case of indirect taxes, the average customs duties were reduced to 40 per cent, which would go down by another 5 per cent for all commodities by 2005.

As far as the central excise was concerned, not only were the number of rates reduced, but it was also brought under VAT (Value Added Tax) with a single rate in accordance with global practice.

As part of the second-generation fiscal reforms, the government of India proposed the same kind of reforms at the state levels also, especially the sales tax.

Taxes paid at different stages of the product line make up for more than 25 per cent of the value of the commodities. It has to be noted that because of the tax component built into the system, Indian commodities are not competitive in the international market. Exports of products are extremely important now that many countries are importing cheaper products to India under the WTO agreement.

Only better tax system on par with the international standards would enable the 'Made in India' products to be competitive in the international market!

The finance ministers of all the Indian states met in 1999 and decided to have April 1, 2001 as the deadline to implement VAT but opposition from some states resulted in its postponment to April 1, 2002. But many experts, both economists and industrialists say that it is dangerous to stop the implementation of VAT or continue postponing it further.

It is in this backdrop that the Confederation of Indian Industry (CII- southern region) had organized a two-day conference on VAT (Value Added Tax).

Among the speakers were Montek Singh Ahluwalia, Member, Planning Commission, Government of India and P C Cyriac, Principal Commissioner, Commercial Taxes, government of Tamil Nadu.

Ahluwalia in his keynote address called for the need to convince all the state governments to change their mindset, and take unilateral measures towards VAT.

"State governments should understand that tax reforms make the states more attractive to investors. States should also understand that VAT is simple and not cascading. Above all, it makes the economy globally competitive." Ahluwalia said.

He confessed that although talks about tax reforms started in the early eighties itself, the real reforms are taking an "incredibly long time." According to him, ideally the clock to tax reforms should have started clicking on the December 1, 2000 but it has not.

He, however, admitted that before they actually go for VAT implementation, the state government will have to usher in changes that are enormous in proportion.

They will have to change the entire government machinery, computerise the system and then finally make everyone understand that VAT can create a buoyant economy.

"VAT involves a change over from the single point system to multi-point system. Unfortunately, there is a lot of hesitation and opposition at the state level, mainly because of certain misconceptions. Even the traders are hesitant because they feel that they would be taxed more when the reality is different. Yes, those who are not paying taxes will have to pay but those who are paying will end up paying less," said Ahluwalia.

Pointing out that although VAT is a non-distortionary tax system, Ahluwalia said that many state governments are still not convinced that VAT would make them more efficient and thus the economy would function better.

He appealed to the state governments, "reform your sales tax even if your neighbour is not doing it. It is ideal if all the states followed suit but at least some should start working."

As we have a CENVAT at the center, we need to have VAT at the state level also, Ahluwalia said. "What is needed is one integrated system and not two parallel systems; one at the center and another at the state."

Stressing the need to extend VAT to the services industry, he said, "international experience shows that VAT lends itself through complete integration between services and manufacturing. VAT is a way to bring the services industry also into the tax bracket."

He urged the CII to take efforts to convince the state governments to fully understand the implications and need to take steps towards VAT unilaterally.

Cyriac on his part said that even though 50-75 per cent of state revenue came from the sales tax, it was still essential to change the mindset.

R Seshasayee, chairman of the conference said that CII was for the earliest implementation of VAT.

"Now that April 1, 2002 is set as the time frame, the industry also has to do a lot of work. As a vast section of the population remain outside the market, it is the duty of the government and the industry to help them come up."

He too, felt the need to modify VAT with the Indian context in mind.

"Like we have free flow of trade between countries in the liberalised economy, with the implementation of VAT, we can have free flow of trade between states which will remove the existing inequalities between them. VAT will definitely have decisive influence in the transfer of resources."

Seshsayee said that the services industry should be brought under VAT.

He added that even though some industries in certain states would have to restructure with the introduction of VAT, it had to be done without delay, as "we need a transparent tax system."

The Economic Research center of the CII talked about the need to have a VAT Commission to advise the state governments to fix uniform rates for various commodities, monitor tax completion, eliminate cascading and settle disputes between states on sales tax issues.

But to form such a commission, the constitution will have to be amended.

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