VAT effect begins to show, states’ revenues soar

Revenues: Consider these numbers. Harayana, the first state to implement VAT, has recorded a 13 per cent spurt in tax collections in the first two months of the current fiscal. The total revenue generation in the state has shot up by 28 per cent in the state after implementation of VAT.

The experience has been similar for Karnataka. ‘‘We are very happy. Our collection growth for April and May has been very impressive,’’ says S Subramanya, secretary, finance. The first month’s tax collections under VAT has shown an impressive 25 per cent growth over the same period last year. The Commercial Taxes department has issued TIN to all dealers and it is being quoted also to a large extent.

From all the states, it’s broadly the same message: there has been an increase in the tax base — if earlier it was only manufacturers and importers, now even resalers are under the tax net. But some contentious issue remain.

Median rate: There has been a demand by some of the VAT states to bring about a median rate of 8 per cent. However, neither the empowered committee nor experts feel that this will be a step in the right direction.

In fact, tax experts feel that introducing a third rate will defeat the very essence of VAT. As M Govinda Rao director of IPFP explains, “The idea is to reduce the gap between the two present rates of 4 per cent and 12.5 per cent. We should reduce the items under the 4 per cent slab and bring most of them under 12.5 per cent. Or the other option is to put in one rate of, say 10 per cent. One rate will help in movement towards GST and not multiple rates.’’

Even the Empowered Committee is not putting much thought on introducing a third rate. As Ramesh Chandra, secretary of the Empowered Committee says, “We are not planning to bring up in the issue in the meetings planned for this month.”

Harmonisation of products: To put an end to confusion on divergent VAT rates on same products across the various states, the Empowered Committee decided to put products in broad categories and levy specific VAT rates. However, most of the states has yet not been able to complete the classification process.

Another crucial change is to the list of items identified by the state government as inputs. While some states like Delhi had a more detailed classification extending up to 8 digits, other states like West Bengal and Maharashtra had lists restricted to 4 digits, making them more generic. To accommodate this classification, states like Delhi revised their lists.

As the confusion continues, it is clear that the harmonisation and simplification of the VAT that the Empowered Committee has been trying to achieve is becoming difficult with two tax slabs, numerous exemptions and some states not participating. All the more reason to think in terms of one VAT rate.

The Politics: The political game by the BJP-ruled states to derail the process is not working. Now, the BJP states have put the onus on UP and are waiting for UP to join the new tax system since bulk of the BJP-ruled states have UP in the middle, geographically speaking.

Empowered Committee chairman Asim Dasgupta says that he is yet to get a clear indication from the BJP-ruled states as to when they can join VAT, traders and industrialists in these states feel otherwise.

A state government official in UP conceded that non-implementation of VAT was having a deterrent effect on some industries. Since VAT has been implemented in Delhi, there is difficulty in invoicing and stock transfer, he added.

It’s a matter of time, is the consensus.

(Tomorrow: The states’ report card)

PART II

PART III