New Delhi, April 30: Economic reform has found an unlikely champion: Left-ruled Bengal.
Finance minister Jaswant Singh today did what his party had been asking him to do all along: he officially ruled out the introduction of value-added tax (VAT) nationwide by June 1.
Asim Dasgupta, his counterpart in Bengal — the CPM-ruled state is known to choke on nearly every pill of reform administered — announced, on the contrary, the determination to go ahead with VAT on the appointed date.
VAT is set to replace a mass of cascading levies on manufactured products, including sales tax levied by the Centre and states. The levy, which will make evasion difficult, has been opposed by traders.
Singh told the Lok Sabha: “Jab tak VAT ki puri tayyari nahin hoti, tab tak VAT lagoo nahin hoga (We will not introduce VAT till all the arrangements are in place).”
Outside the House, 16 states decided otherwise. On their behalf, Dasgupta told reporters: “We will go ahead with our decision to implement value-added tax by June 1.”
Dasgupta is leading the VAT brigade as chairman of the empowered committee of state finance ministers.
In a reversal of roles, Singh, a reform-pusher otherwise, said: “A patch-work or poorly implemented VAT will not serve our purposes.”
The minister had no chance of wriggling out with vague statements indicating a VAT rollback as his party colleagues virtually collared him into taking a stand far more belligerent in tone than what had been scripted for him by his aides in the written speech from which he was reading out in reply to the debate on the budget.
His statement prompted Congress leader Jaipal Reddy to joke: “This is the mother of all rollbacks.” This is the third rollback Singh has been forced to concede since presenting his maiden budget. The minister has already rolled back urea price hike and attempts to bring the powerloom sector under the Central excise tax net.
The finance minister has been under intense pressure over the last two weeks from party leaders worried about the impact VAT would have on the BJP’s poll prospects in north Indian states where traders, who are traditionally BJP loyalists, have been agitating against the measure.
Singh pointed out in his speech that VAT legislation submitted by states were not uniform. They would have to be made so by May 5 if VAT were to be brought in by June 1, implicitly stating this cannot be done.
At the same time, the finance minister said he could not compensate states for revenue losses if they decided to reduce VAT on goods like medicines from 12.5 per cent and that in such cases, he would also not reduce Central sales tax from 4 per cent to 2 per cent.
Under the roadmap for the introduction of VAT, Central sales tax (CST) is due to be reduced to 2 per cent and phased out altogether in two years.
Dasgupta countered Singh’s statement by arguing that if CST — a tax collection out of which states get a share — remains unchanged, they don’t really need compensation for bringing in VAT.
“We need the support of the Central government only in expeditious clearance of the states’ VAT Bills,” he said. The Bengal finance minister, who has staked his personal reputation on pushing VAT despite the strong opposition, said he would be meeting both the finance minister and deputy Prime Minister L.K. Advani to get their help in obtaining presidential assent to these Bills.
If Dasgupta manages to push through VAT in 16 states, just as Haryana has already done, there is little the Centre can do to stop him. The Centre at best can advise the President to delay assent but then Ordinances can be issued for the interim period.
The problem for the Centre and states not opting for VAT is that if it is brought in by these 16 states who represent the overwhelming majority of producing states, the obvious benefits of the system will mean manufacturers and large traders will prefer to base themselves in these states to the loss of others.
This is because the new tax allows manufacturers and distributors to claim tax credit for taxes paid anywhere in the country on any of the raw materials or finished products finally assembled and sold by them. Industry lobbies see this as a way of reducing transaction costs and have long been lobbying for this.