VAT a move, keep walking

 

 

State sales tax was phased out in a single stroke and Value Added Tax regime started in most States on 1 April 2005. Despite loud protests from different organisations of traders and apprehensions raised by various state finance ministers, the Central government refused to budge. The Chairman of the VAT Empowered Committee and West Bengal Finance Minister Asim Das Gupta, in a heavily crowded press conference in Delhi Secretariat, said, “I know there are flaws in the way it is being implemented. However, I am assured it is a far better system of taxation.” Reports of tax collections in almost all the VAT States is positive and all hue and cry and apprehensions now seems to have subsided. Implementation of VAT is the most scientific and important reforms in the Indian tax system.

The latest report of Reserve Bank of India, ‘State finances: A study of budgets of 2006-07’, made some interesting revelations about State taxes. In the year 2006-07, during April-December, tax collections in States was Rs 3,10,266 crore in which revenue contribution of lotteries and liquor was approximately Rs 40,000 crore, which is 13% of the entire State revenue collection. What will you say – promotion of vice or something else? Now, time has come for States to ponder over some really new and innovative methods of revenue enhancement than being dependent on traditional revenue sources. The system of VAT has firmly taken deep roots in the last year and a half but its flaws cannot be ignored. There are discrepancies in the VAT rates on the same product in different States. This leads to distortions. For example, coconut oil, tea and coffee powder – they have different VAT rates in Orissa, Andhra Pradesh and Bihar. The trend of tax collection is slated to change in coming 4-5 years. Aggressive expansion in organised retailing and vigorous growth in services will be drivers of change. The service sector will have the larger share in GDP in the years to come. Therefore, in the changing scenario, States will have to reformulate strategies to augment collections. That is the way to buoyancy.