Vat's up for you

Can we get our Value-Added Tax (VAT) regime on the road at the third attempt? The proposed date for launch of the state level Vat is April 1, 2005.

Finance minister P Chidambaram claims there is a political and economic consensus for the changeover, but his two immediate predecessors in the finance ministry have hit last minute road blocks that scuppered the launch.

For the economy, Vat makes a lot of sense. Expansion of retail business and providing a common national market is difficult unless there is a common taxation system in the country.

Under the proposed system, there will be a mean rate of 12.5 % for most commodities, and a lower rate for life savings drugs and mass consumption items. There will also be a higher rate for tobacco, while taxation of petroleum will be outside the Vat structure.

Mr Chidambaram has said the rapid adoption of VAT by countries around the world was probably the most important tax development of the 20th century.

Over 125 countries depend on Vat today as the key source of the government revenue. In 2002-03, the quantum of compensation demanded by the states pushed back the deadline.

Next year, Jaswant Singh could not get over the anxiety of industry over the tax regime which will replace all state level sales tax. This was despite a commitment made by him in Budget 2003-04 to introduce the tax from April 1, 2003.

This time it is the traders who have “expressed reservations�. From December onwards, Mr Chidambaram has begun to hold a series of meetings with traders in different parts of the country to allay their apprehensions.

The ministry has explained that Vat rules will be applicable only for those traders who have a turnover of at least Rs 5 lakh.

Moreover, for traders with turnover of up to Rs 40 lakh there will be a facility of compounding, which would minimise their need for detailed account keeping. The unexpressed fear of some sections of traders is that Vat makes the billing system pretty transparent for a business.

The switchover may, therefore, lead to a demand for higher taxes. In Haryana for instance, some medicine shops are reported to be demanding a higher than printed retail prices. The state has already introduced Vat from this fiscal.

According to finance ministry estimates, 27 states and Union Territories out of 35 had already got their legislation ready and the remaining are expected to do so by January.

The Centre has also agreed to provide 100% compensation for any revenue loss on account of their transition to Vat in the first year, 75% in the second year and 50% in the third year.