From Business world of 8 March 2005.
Better postpone
VAT
As April 1 approaches, the disquiet
amongst traders about the introduction of Value Added Tax (VAT) nears a peak.
Their concern is simple. Whereas the taxes it will replace, namely excise and
sales tax, required estimation of one base, namely value of production or
sales, VAT will involve the calculation of two, namely value of production and
taxed inputs. The latter figure will be a sum of all inputs. Thus the figures
required to calculate the tax will multiply manifold, and so will the power of
tax authorities to query figures and to allow or disallow deductions. It is the
conviction of traders, based on considerable experience, that tax authorities
are insensitive, arbitrary and corrupt; the new tax will increase their
opportunities for displaying these traits manifold.
In order to
perfect the tax, the finance minister recruited one of the world’s most
renowned experts on VAT on his staff some months ago. It is impossible to
assess labours done behind closed doors. But one thing is certain: that in
these months, the ministry has made no effort to allay taxpayers’ fears, to
smooth the rough edges of the tax, or even to create a machinery that would
sympathetically address problems that are going to arise.
Let there be no
doubt that problems will arise. Haryana introduced VAT a year ago, and the
experience of its victims over there has been harrowing. This has been one of
the major factors behind the overwhelming defeat of Om Prakash Chautala’s
Indian National Lok Dal, which only five years ago had scored an equally
decisive victory. Mr P Chidambaram is not known to be very sensitive to the
woes of taxpayers. On becoming finance minister, he ordered his tax officials
to recover dues without mercy; they have gone about attaching assets indiscriminately;
some of them have not hesitated to treat court orders with contempt.
They were set an
example from the highest level when the government issued an ordinance to
collect from ITC tax dues that the Supreme Court itself had declared invalid.
Such high-handedness may satisfy some egos; it may even sell well with those
allies of the government who consider any stick to beat business with as
justified. But if the fate of the NDA government should teach its successor
anything, it is that government should never be used for settling scores.
Government should always be conducted with a judicial frame of mind.
The government
may take comfort in the fact that the central VAT has been in force for some
years; the problems with it have been more or less ironed out, and it works
fairly well. But its experience should not be projected to the states. It was
difficult to persuade the states to go over to VAT. So Yashwant Sinha, the
previous finance minister, found a way out: he left it all to a committee led by
Ashim Dasgupta, the finance minister of West Bengal. Dasgupta managed to bring
most of the states on board, but only by minimizing the differences between
state sales tax and the new VAT. Regulations have been copied wholesale from
the old sales tax rule books into the new ones. State tax officials have no
training in the administration of the new tax; in its absence they will fall
back on their old ways.
What is worse,
the union finance ministry also adopted a hands-off approach to state VAT. The
central government has vetted the VAT legislation of all states and ensured
uniformity. But it is not uniformity of legislation that is important; it is
uniformity of implementation that matters. It is not known whether the finance
ministry has expended any energy on ensuring this; if we go by the finance
minister’s speech, he would hardly seem to be aware of the radical change in
taxation that he has scheduled for April 1.
The days that
are left till that date are too few to do the job; hence if the finance minister
wants to do a good job of it, he ought to postpone the deadline. But
postponement will not be enough. What is required is to make the framework of
law and rules in every state unoppressive and friendly to the taxpayer. In
other words, the finance ministry needs to set up machinery that would take on
board the misgivings of the taxpayers and bring each state’s legislation into
conformity with good fiscal practice.
That would not
only bring greater justice; it would bring considerable kudos to the finance minister.
As his order to collect “arrears” shows, he is not known to be very sensitive
to the taxpayer. But the taxpayer is ultimately the breadgiver of his
government; and he is one of those that would decide his government’s fate. Out
of political self-interest if not out of a sense of justice, the finance
minister should demur.
