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THE VAT CONUNDRUM
P A Francis | Thursday, April 17, 2003, 08:00 Hrs  [IST]

After a series of discussions over last several months, 16 states had finally agreed last week to implement the Value Added Tax from June 1. The states which have expressed their willingness to introduce VAT at the last Tuesday meeting are Maharashtra, Gujarat, West Bengal, Madhya Pradesh, Andhra Pradesh, Karnataka, Tamil Nadu, Kerala, Haryana, Assam, Orissa, Bihar, Jharkhand, Tripura, Meghalaya and Goa. The 12 other state governments, at the same time, have not set any deadline for its implementation. One reason for the reluctance of most state governments to introduce VAT is the fear of losing revenue after the change over to the new system and the increasing pressure on them from the trading community. As far as the revenue loss is concerned, the Central government had already promised the state governments to compensate for 100 percent of the revenue losses in the first year, 75 percent in the second year and 50 percent in the third year. Even this offer is not very tempting to many state governments. According to Asim Dasgupta, the West Bengal finance minister and the chairman of the Empowered Committee of state finance ministers, the 16 states which have agreed to implement VAT, account for over 75 percent of the country's trade and industrial activity. That percentage is good enough. But, with just one and half months left for June 1 and looking at the pace of framing draft rules and other procedures by 16 states, the possibility of their meeting even the new deadline looks doubtful. Only a dozen states out of 16 have come out with draft VAT rules and none of them are identical. Each state government has come out with its own recommendation on turnover limits for inclusion of a trader under VAT registration. This would mean that a retailer can be either a VAT registered trader or a trader paying the usual composite tax. In other words, traders with same turnovers in different states will have to go through different set of rules and regulations. This can lead to widespread confusion amongst the trading community with varying prices for same products in one particular area itself. Traders are opposing VAT not only because of this possible confusion but also because a good percentage of the dealings both in wholesale and retail levels are currently taking place without invoices. Pharmaceutical trade is no exception to this illegal activity. Such trade practices have been causing grave concern to the Centre and state governments as it leads to huge excise and sales tax revenues losses. No doubt such revenue leakages need to be sealed. But for that there has to be some amount of uniformity in new tax rules while being introduced nationwide. But this can be done only with complete coordination between the centre and all state governments. If that is not possible, the VAT introduction in this country can only remain a pipe dream.

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