Hopeful signs for implementation of Vat
Fears that Vat implementation will mean a revenue loss have, fortunately, not been borne out. The finance minister says revenues from Vat in the 21 states that have implemented it have risen by 15.3% in the first quarter. Good news, but a clarification is in order. The actual or net increase under Vat is about 5% or so, because even under the earlier sales tax, most states would have seen revenues increase by about 10%, due simply to the nominal growth (real growth plus inflation) in states’ GDP. This is also the basis for calculating the losses incurred by any state for claiming compensation from the Centre. Till the end of July, only four states (Andhra, Maharashtra, Bihar and Tripura) are known to have filed loss claims.
But the good news needs to be emphasised, as this should prompt the Centre to review its plans for phasing out the central sales tax (CST) and for non-implementing states to reconsider their stand, as the costs of not doing so are clearly high and rising. As expected, states that had, on average, higher sales tax levels, such as Maharashtra, Kerala and Andhra, have seen only a marginal growth (decline in real terms) in their revenues from Vat. Others, which had a lower sales tax regime, have seen whopping increases in their revenue collections. Orissa tops the list with an increase of 35%, Delhi by 30% and Karnataka and Himachal Pradesh by 27% and 20%, respectively.
A strong positive attribute of a Vat regime is the uniformity in tax rates across all implementing states. This has largely been achieved. Some anomalies, however, continue to remain, like Punjab refusing to raise the rate on diesel from 8% and Haryana and Delhi continuing with 12.5%, when the agreed rate is 20%. Similarly, Andhra, Bihar, Orissa and Goa continue to charge 12.5% on tea, while the agreed rate is 4%. This is unacceptable. State governments must rise above short-term political considerations and work for a common national good.
The Empo-wered Committee has institutionalised another variation, in its decision of July 9, to allow states to charge only 4% on industrial inputs, where more than 50% of the production is used as an input for further production and presumably exported. This has been ostensibly done to help manufacturers, by reducing the amount of credit accumulation. This can result in another distortion, similar to that arising from central excise exemptions currently available for some states/ regions. Improving the refund mechanisms and adopting a uniform rate would be a more effective measure.