The Indian indirect tax structure is non-transparent and has cost-cascading effects. It also makes it difficult for India to defend anti-subsidy investigations abroad. Therefore, it is universally agreed that India should move towards value-added tax, as more than 120 countries have done, and this was also the recommendation of the Kelkar task force on indirect taxes. VAT should mean complete abolition of all other indirect taxes, such as Central sales tax and local body taxes. Instead of resorting to turnover taxes, service sector taxation should also be integrated into VAT. Unfortunately, no one interprets VAT in this full-fledged sense. The chairman of the empowered committee of state finance ministers, set up to push VAT, is West Bengalís finance minister. It is paradoxical that Mr Asim Dasgupta wants VAT, but decides to impose 20 per cent entry tax in West Bengal. The issue is the dismal state of state government finances, as well as the stateís unwillingness to ensure devolution and revenue generation for local bodies. Consequently, the finance ministry interprets VAT in the limited sense of unifying state-level sales tax, with CST reduced from 4 per cent to 2 per cent during 2003-04. Prospects of this limited VAT have also now disappeared. The initial deadline of April 2001 was pushed back to April 2002 and pushed back again to April 2003.
April 1, 2003, has passed and there are no signs of VAT. The empowered committee is due to meet on April 8 to find a solution. Solutions will be difficult to find. The issue is not so much a lack of preparedness in states, meaning legislation, rules and registration of dealers. While only 17 states (and union territories) are ready as of now, and for VAT to be implemented all states have to agree, this problem can be sorted out later this year. Nor is the issue one of revenue losses by the states. Not only is the core VAT rate of 12.5 per cent a revenue-neutral one, but the Centre has also agreed to compensate states for revenue losses, apart from additional revenue through service-sector taxation. The core problem now is resistance by traders, an agenda that many states have picked up, given the election year. Why traders should oppose a simpler and transparent system with reduced compliance costs is unclear, unless one factors in the phenomenon of large-scale excise and sales tax evasion. Back-of-the-envelope figures are that such evasion amounts to 40 per cent. As with the Kelkar recommendations on personal income taxes, simplified procedures hurt those who evade. VATís double (input and output) check will make evasion difficult. Hence, evaders will again hold the country to ransom.