Saturday, December 29, 2007

One of the articles published in Excise Law Times

By G. Gokul Kishore

The voices uttering the word 'VAT' are gaining strength as days pass and it has taken roughly thirty years to deliberate on the subject on such a scale since introduction of a Value Added Tax in Brazil in 1966. Though by way of 'proforma credit' and other such schemes, some form of reform was attempted, the acronym came with a bang in 1986, when a modified version, in that it was confined to excise duties levied and administered by the Union Government, was introduced and within excise, it was restricted to input tax credits. The concept of a single commodity levy encompassing both the administrative units viz., the Union and the States is fraught with multifarious and multitudinous effects and counter-effects which have been analysed by tax administrators and experts of Public Finance. The objective of this article is to throw light on the problems in implementing a complete VAT and the possible options to make the process workable.

VAT literally means 'Value Added Tax' i.e. a tax on the value added. Addition of value means the incremental intrinsic monetary value of a commodity which is scientific, objective and quantifiable. While multi-level taxation of a particular goods is economically undesirable in that it would cause an upward spiralling of the prices over and above the true and real worth of an article, yet the indispensability of a regressive tax like excise with its equal incidence forces injection of some progressiveness in such a levy. The result is the taxation of value additions at every stage till the goods reach the ultimate consumer. VAT provides the much needed veil of progressiveness to commodity taxes as in a developing economy like India, the ideal predominance of direct taxes over indirect taxes is a distant dream.

There are three stages in the process of VAT. First stage involves making the federal commodity tax as 'value-added'. The second stage relates to co-existence of a state level VAT alongwith the Central VAT. The final stage is the integration of the value added levies administered at both the federal and local levels into one single tax. The Union Excise has been termed as Central VAT (CENVAT) which is a rebatable levy for the taxable industrial consumer extending to almost all the commodities irrespective of the differentiation 'inputs' and 'capital goods' with the 'difference', till its obliteration recently, costing crores of rupees in litigation for the assessees and locking up revenue for the exchequer. While at the federal level the tax at the manufacturing stage, the Union Excises have been converted into a 'VAT', the Frankenstein of conversion of sales taxes of States into VAT and their integration with the Central VAT has made the entire process a non-starter. The various problems associated with the introduction of a total VAT regime in India logically take us to the second stage in the process i.e. dual VAT as advocated by economists and the Tax Reforms Committee. It is the realistic and workable formula in the Indian context since taxing the same base by various tiers of administration is unavoidable. The narrow tax base of both direct and indirect taxes, though considerable efforts have been taken to widen the same in both of them by bringing a host of services in the net of the latter, is an indicator of limitations in the commodity taxes reforms.

As Dr G.K. Pillai notes in his book 'Value Added Tax', the various studies of incidence of such reformed commodity tax reveal that regressivity of indirect taxes is reduced to a great extent only when essential commodities are not taxed and in countries where such a system could not be introduced, the progressivity has been very marginal. For a country like India where, even according to official statistics, more than a quarter of the population survive below poverty line and where the established social security measures such as Public Distribution System and fertilizer subsidies are being done away with, exemption of a few essential goods from the purview of commodity taxes should be seriously considered. The revenue foregone by such a measure would be offset by VAT, as experiences with such steps point out.

The Central Sales Tax, collected and appropriated by the exporting states in the case of inter-state trade, may have to be rebated by the importing state. This revenue has to be reimbursed by the Centre taking into account the recommendations of the Finance Commission and also the increasing revenue accruing to the Union Government from the service sector tax-base which has widened significantly in recent times. In this connection the idea of leaving the service sector for the states may operate against the interests of under-developed states where the tertiary sector has not picked up on a cognizable scale. The suggestion of abolition of CST altogether would be opposed tooth and nail by the taxing states which invariably belong to the developed class. The importing state would suffer from 'double- jeopardy' (in the literal sense) if it were to provide abatement for the levy in that while on the one hand the tax revenue from finished goods is reduced, these under-developed states which are more of consumers would be left with very little space for value-addition and consequently tax revenue gets deflated.

If the rough ride of passing through to a system of uniform sales tax among all the states which is the starting point is any indicator, the authorities concerned will encounter stiff resistance given also the pressures of neo-liberal processes of liberalisation and privatisation on the near-bankrupt states. The pauperised states could ill afford to think of tinkering with the single largest contributor to their coffers. The constitutional pre-eminence of the two levies, excise and sales taxes and their role in the finances and hence that of the governance in a loose federal setup like India only leads one to safely conclude that VAT in toto, is utopian.

Introduction of a total VAT regime when many centrifugal forces are at work in a heterogeneous federal polity can only spell greater danger to India as a nation-state. The developed states with wider tax base and better administrative resources to ensure compliance would significantly gain at the cost of the lesser developed states and the disparity in the growth rates would widen. The effectiveness of the role of the Centre in the wake of emergence of coalition governments in such a scenario is doubtful, to say the least.

The idea of transferring almost all the excises to the states, with the Union retaining only a few commodities and then providing for a legal frame-work to ensure horizontal distribution is, prima facie, not necessary as buoyancy in revenue collection would neither get improved significantly nor is it workable. The experiences of the intransigence exhibited and the spectacle of the Centre being a mute witness to sharing of river waters in spite of awards of legally constituted tribunals would definitely point to replication of such a performance by the states. The consequences of choking of finances by cash rich states to the under-privileged states would be disastrous for the country as such.

After extension of VAT to the state-level which may be a calibrated exercise by restricting it to whole-sale stage, price effect should be studied which may provide valuable conclusions in the direction for further reforms. For this purpose, the valuation machinery should be geared up. Incidence of such Value Added Tax should be analysed as non-economic aspects of reforms are as important as economic ones. The dwindling state social security further reduces the tools of control available with the administration to counter the onslaughts of market forces and the time is more suitable to retain taxation as one. Taxation as a tool of re-distribution to ensure the betterment of the impoverished masses gains currency under such circumstances. Conservative it may sound, yet the paradoxes of the New Economic Policy like withdrawal of the State from business activities reserving the right to interfere through regulatory mechanism which may extend to takeover in 'public interest', do not obviate the welfare obligations of the State.

Transparency and right to information being the modern day hymns of the public bureaucracy, sufficient publicity should be given before implementation is contemplated and the proposals need to be discussed with all the interest groups such as chambers of commerce, traders forum, consumer action groups and others. In this direction it is to be welcomed that to take on board all the states without any differentiation, the date for introduction of VAT in states has been put off till 1.4.2003. Preparatory time is very crucial and even if it means travelling beyond the scheduled time, it is sine qua non for the reforms to succeed. With all the necessary information being made available, the apprehensions and inhibitions of the states would give way to realistic approach tempered with rationality.

An area that needs crying attention is reforming the sales tax administration of the states which vary in every aspect. Variation may be explained as necessitated by circumstances peculiar to that particular state. But that does not condone the effects of an archaic regime contributing, in part, to the skewed development pattern obtaining in the country. While competition among the players may be beneficial for the economy, yet the same among states is neither politically nor economically desirable. Hence the state governments should whole-heartedly agree over comprehensive reforms of their sales taxes aimed at achieving uniformity, certainty and equity. Making those levies vatable would require enforcement of document-oriented business practices which is feasible only upto a certain point. With misplaced enthusiasm, trying to capture all and sundry to include even the remote retailer would make the levy meaningless given the literacy level and collection and compliance costs.

Full-fledged VAT in states is not practicable in the near future. Integration of state VAT with central VAT would further require, inter alia, coordinating machinery with efficiency of highest order for matching of sale and purchase invoices, detection of evasion and ensuring better compliance. With the governments at both the levels unable to rein in their expenditure and with augmentation of resources through rate revision ceasing to be an option, any reform measure with multiple, arduous and often non-feasible factors in full play is bound to be jinxed. As discussed, a middle-path in this context, a dual VAT, is the more practicable proposition as the Central VAT is already in place and reforming the states' sales tax to make it vatable should lead to an improved system

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