The Telegraph
Since 1st March, 1999
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- The Centre's growing economic power and political weakness

It has turned into a pattern. Those who have coaxed a majority of the states to surrender their constitutional right to levy sales tax and, in lieu, introduce a Centrally-directed value-added tax with effect from this year, meet every now and then in New Delhi under the benign patronage of the ministry of finance. The raison d'tre of such meetings is to assure themselves, and, in turn, the nation, that this substitution has been a thundering success. Appreciating the subtle nuances of language does not come easily to the ordinary householder. It is therefore quite a dilemma for him to decide whether what the drum-beaters of VAT are indulging in is prevarication or dissembling, or both.

Take the latest statement issued by these eminences. They have gone on record that the states which crossed over to the VAT system have done remarkably well; between April and December, 2005, the revenue accruing from VAT to these 23 states has gone up, it is claimed, by 14.3 per cent over what collections from sales tax were in the corresponding period of the previous fiscal year. Is that not clinching proof of what a wonder VAT is' Those participating in the celebrations have made an additional point. The success of VAT is so pronounced that perhaps there would be no need for utilizing to the full the sum of Rs 5,000 crore set aside in the Union budget to compensate the losses incurred by the joining states in the first year of introduction of the new system. The amount of compensation doled out till now is only Rs 1,026 crore.

Questions nonetheless rear their head. Even assuming that over the first half of 2005-06 the VAT-joining states have experienced a 14.3 per cent rise in revenue, what about the performance of the non-joining states' Can those who congregated in New Delhi last December for the self-congratulatory session offer evidence that the increase in sales-tax collections during the first half of this year over those in the corresponding period last year has been less than 14.3 per cent' As long as this query is not answered in the affirmative, the superiority of the VAT system cannot be logically established.

The pall-bearers in New Delhi cannot avoid facing another query. The sales-tax collections in the entire country in 2002-03, 2003-04 and 2004-05 were Rs 86,073 crore, Rs 98,377 crore and Rs 112,066 crore respectively. Work out the arithmetic; over the last two fiscal years, the increase in sales-tax revenue was, in any case, around 14 per cent, or a bit more. The introduction of VAT has obviously not made any difference till now to the overall trend of collections from commodity taxation. The point can be proved even for individual states. In West Bengal, for instance, sales-tax collections in 2002-03, 2003-04 and 2004-05 were respectively Rs 4,191 crore, Rs 4,946 crore and Rs 5,836 crore. Whoa, the annual increase in sales-tax revenue recorded in 2003-04 and 2004-05 was as high as 18.1 per cent in both years!

Since discretion is the better part of bragging, the so-called empowered committee, which met in New Delhi in December, did not disclose separately the VAT performance of West Bengal in the first half of 2005-06. But this must have been disappointing, for already a sum of Rs 88 crore has been paid out to the state as compensation against revenue loss. What is particularly worrying is that hefty amounts of compensation have already been disbursed by the Centre to such important states as Maharashtra (Rs 259 crore), Karnataka (Rs 251 crore), Andhra Pradesh (Rs 193 crore), Kerala (Rs 181 crore) and Bihar (Rs 47 crore) as well. In each of these states, the rate of increase in collections under VAT must have been lower than what it was during the first half of the last fiscal year. The scheme of compensation ordained by the Union government, let us remember, is 100 per cent in the first year, 75 and 50 per cent respectively in the second and third years, and nothing from then on. Given the trend of collections that is emerging, the state governments signing up for VAT have to realize what a frightful prospect awaits them.

The assertion that the VAT experiment has been so successful that only a paltry figure of Rs 1,026 crore out of the total allocation of Rs 5,000 crore for the year has been disbursed as compensation is a prize example of obfuscation. In any case, the sum of Rs 5,000 crore was set aside as compensation to cover all the 30 states in the country. However, seven major states, including the state with the largest population, Uttar Pradesh, the state with the largest size, Madhya Pradesh, and the most economically advanced state in the south, Tamil Nadu, have refused to join the VAT game. Had they joined, they also would, in all probability, have needed to have been paid heavy compensation. That apart, the statement carried in the press regarding payment of compensation of only Rs 1,206 crore is silent about whether this disbursement is against losses suffered during the first month or the first quarter or the first six months of the fiscal year.

Two further points deserve clarification. Several state governments, in contravention of the declared two-rate structure of VAT ' 12.5 per cent and 8 per cent ' have excluded petroleum products from the purview of the new system and have continued to impose sales tax on these products at the rate of 25 per cent or more. Should pressure be mounted ' it has actually already been mounted ' to bring taxation on motor spirits within the VAT fold and slash the rate of tax down to 12.5 or 8 per cent, the state governments are bound to lose heavily. To quote again the instance of West Bengal, of its total collections from sales tax of Rs 4,191 crore in 2003-04, as much as Rs 893 crore, or 21.3 per cent, was from imposts on motor spirits. In the following year, out of the total sales-tax revenue of Rs 4,946 crore raised in the state, an amount exceeding Rs 1,200 crore, or close to a quarter of the total, was from petroleum products. Were this lucrative source of revenue-raising to disappear or be drastically reduced, the state government would be in a worse financial mess.

The other question mark is with respect to the revenue from Central sales tax, imposed at the rate of 4 per cent on so-called 'goods of national importance', and collected and retained by the state governments in terms of an agreed formula. New Delhi is determined to phase out this tax in the course of the next couple of years. This would mean a loss of revenue of around 12 per cent of aggregate revenue from commodity taxation for almost all the states.

It is, can we not say, a strange phenomenon that is developing in the country. The political clout of the Union government vis-'-vis that of the states is weakening each day. In contrast, its economic power is growing apace, thanks to the thoughtlessness exhibited by some state governments; doing off with the sales tax is a gross example of how the states are contributing to their economic self-destruction. The Centre might consequently feel bold to keep imposing on the states' priorities that are vastly different from the needs and sentiments of people at the grassroots. This would be a recipe for national disaster.

One or two state governments had made a commitment to review their decision to join the VAT system after taking into account the experience during the first years of its operation. That first year is about to end. Is it not time for these governments to wake up before it is too late'

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