The Telegraph
Since 1st March, 1999
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- The way VAT has entered the states is unconstitutional

Obfuscating saturation advertisement in the media, lavishly financed by taxpayers' money, has hailed the occasion. Congratulatory statements have been issued on behalf of the World Bank and the International Monetary Fund. It has nonetheless been a wobbly beginning for the value added tax. On the date of its supposed introduction ' the first day of the new fiscal year ' only 18 of the 30 states and Union territories comprising the country had signed in. The list of non-joiners includes the economically most important state in the north, Uttar Pradesh, as also the economically most important state in the south, Tamil Nadu. The country's largest state, Madhya Pradesh, too, is keeping out of the new tax system. With half the country not joining, it is a picture of total confusion. Traders are on the warpath for their own reasons. But the worst sufferers, should the new tax system be still persisted with, will be those engaged in small-scale industrial activities. They will go to the wall unable to compete with VAT-advantaged giant-sized industrial concerns; the prospect of a substantial swelling of unemployment is hardly negligible.

In contrast, the denizens of big industry are happy beyond measure. Their kingdom is about to come. The VAT regime paves the way for a unified commodity market in the country untrammelled by varying tax rates for the same commodity in different states and with a simplified two-rate system for the entire range of commodities. In the process, the new regime promises to throw out of the window the principle of progressive taxation featuring in modern societies since the second half of the 19th century. The VAT rates structure, as ordained by New Delhi, will ensure that a non-motorized bicycle and an American-type luxury limousine are taxed at the same rate.

The more interesting aspect of the innovation in the tax system is however the legislative procedure followed to usher it in. A draft bill was suggested to each state by the Union ministry of finance. The states accepted this draft with minor emendations to accommodate local factors. The bills were then moved in the respective legislatures for consideration and passing.

It is an integral part of legislative procedure that the objects and reasons for a proposed bill must accompany its presentation before the legislature. The following paragraphs are excerpted from the text of the objects and reasons for the VAT bill as submitted by a particular state government. This text is more or less identical in the VAT legislations passed in all the joining states.

'The Chief Ministers of States and the administrators of the Union Territories have unanimously resolved in a meeting by the Union Finance Minister on the 16th November, 1999, to bring out major reforms in the method of taxation of commodities in the country by replacing the existing scheme of sales tax with the Value Added Tax (hereinafter referred to as the VAT) scheme. In pursuance of such agreement, all State Governments and Union Territories have, already initiated necessary steps towards introduction of a legislation on the VAT under the guidance of the 'Empowered Committee of the State Finance Ministers on Sales Tax Reforms'

'3. The existing sales tax structure has unduly increased the tax burden on a commodity by taxing both inputs and outputs and thus, is creating a cascading burden of taxation resulting in adverse effects on the economy. The VAT scheme will be helpful to eliminate the tax burden by setting off the tax paid on inputs against the output tax payable. The VAT scheme will, thus, encourage industries, trade and the people. It also results in augmentation of revenue through widening of the tax base and ensuring better tax compliance.

'4. The Bill seeks to introduce the taxation of commodities by way of the VAT scheme in lieu of the existing scheme of sales tax.

'5. The Bill has been framed with the above objects in view.'

The facts emerging from this statement of 'objects and reasons' have no ambiguity about them. The Union finance minister convened a meeting where state chief ministers were present; the decision was taken at that meeting to abolish sales tax and substitute it with the VAT in all the states and Union territories, pursuant to this decision, bills enabling introduction of VAT were placed before the respective state legislatures. Each bill was duly passed. The state governor subsequently gave his assent to the bill, and it became a part of the statute.

Therein lies the problem. The country has a Constitution. It is a written Constitution. Under Article 246 of this Constitution, there is such a thing as the seventh schedule. This schedule consists of three separate lists, the Union list, the state list and the concurrent list. The Union list covers subjects that come under the purview of the Union government which has the prerogative to legislate on these subjects and to preside over their administration. The state list includes items over which a state government has exclusive jurisdiction, including the authority to legislate. The concurrent list covers subjects over which both the Centre and the states have administrative as well as legislative jurisdiction, but in case there are Central laws or administrative decisions taken by the Centre, these will prevail over any state legislation or any administrative decision taken by a state. The prerogative to impose sales tax comes under the exclusive jurisdiction of state governments in terms of entry 54 in the state list of the Constitution. What the Constitution has given only the Constitution can take away. State governments, either singly, or collectively, cannot abrogate on their own a dispensation bestowed upon them by the Constitution. Nor can the Centre, by issuing an executive fiat, obliterate this entry from the state list. Even a unanimous decision of the Centre and all the states will be unable to remove or replace sales tax from the state list unless a constitutional amendment is carried out to that effect.

The same kind of difficulty will arise, it can be argued, with VAT. No state government is entitled to introduce VAT since tax on value addition does not occur in the state list of the Constitution.

In this case, there is a way out though. Under Article 248 of the Constitution, the Union government is empowered to legislate on residual matters not mentioned in any of the three lists. The Centre therefore can, at its own initiative, propose a value added tax and have it enacted by parliament. It may even distribute the entire proceeds of such a tax among the states. But this particular route has not been chosen. Instead, the states have been urged to initiate on their own measures to introduce the VAT scheme in lieu of the existing scheme of sales tax, never mind the Constitution. For years on end, the Washington Consensus has been urging the Union government to opt for an all-India value added tax which will curb the independent tax-levying power of the states and transfer this authority at the Central level. Pursuant to this prodding, the ministry of finance has coaxed and cajoled the states to fall in and agree to cross over to VAT.

The problem will still not go away. External forces which these days have a substantial say in deciding India's economic and fiscal policies may have little or no respect for our Constitution. They may not even be aware that we operate on the basis of a written Constitution. But should our own policy-makers be oblivious of the Constitution' Reforms may be a beautiful event, but, as long as we have a written Constitution, even a beautiful event must pass the test of constitutional propriety.

What is surprising is that at no stage those in charge of piloting the VAT legislation or its vetting have seemingly concerned themselves with the constitutional issue. It could be an instance either of ignorance or of indifference, or, who knows, of total disdain. The World Bank and the IMF have asked us to introduce VAT, how dare you raise the silly issue of the good-for-nothing Constitution'

This may appear as convincing logic in some quarters. The only problem is that, should the authorities themselves spurn the nation's laws and Constitution, others are likely to gather inspiration from the example set. These others will include not only revolutionaries of the People's War Group genre, but also run-of-the-mill murder- ers, forgers, bank embezzlers, rapists ' and arsonists, besides those who specialize in burning the Constitution.

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