By Ranjit Devraj
NEW DELHI, Apr 7 2003 (IPS)

Once again, India’s powerful traders have resisted the introduction of value added tax (VAT), a key element in rationalising the country’s inefficient and corruption-ridden taxation system.

After two failed attempts to introduce VAT in preceding years, no less than President Abdul Kalam announced that the new system would be operative from Apr. 1, but as that day turned out to be April Fool’s Day for officials who have spent up to 10 years in preparation.

India’s central government, which claims that it did not receive adequate support for the measure from the states, has in an official note attributed the failure to implement VAT on the appointed date to ”collusive corruption”.

This means that for now, India will be saddled with the existing system of sales taxes and 14 other levies to be paid for goods moving through checkpoints on the state borders, as if each state were a separate country.

Commented Rajiv Karwal, president of the Consumer Electronics and Television Manufacturers Association (CETMA): ”While, on one hand, we are talking about globalisation on the other hand, we fragment the Indian market by levying entry tax and creating check posts.”

Karwal said resistance to VAT, which would allow free movement of goods and make the whole of India into a single market, may help the traders but cripple the growth of industry.

Why do traders prefer sales tax to VAT? The simple answer is that it is easily evaded and estimates place the levels of that evasion at around 50 percent.

The state of Delhi, which houses the national capital, earns four billion dollars from sales tax but allows traders to evade at least an equal amount, in collusion with officials and representatives of political parties.

According to P N Vijay, convenor of the economic cell of the Bharatiya Janata Party (BJP), which rules the central government, up to 50 percent of all sales in Delhi and its environs are made by the untaxed, unorganised sector where deal margins reach 100 percent.

Nationally, annual sales tax collections now total 17 billion U.S. dollars with the levels of evasion differing from state to state and averaging 30 percent.

”Once VAT comes into effect, the party will be over,” said, Vijay who is also a successful investment banker.

No new dates have been announced as to when VAT will be introduced or if it will be introduced at all in the near future, given that states like Delhi, central Madhya Pradesh and Rajasthan – due to elect new assemblies this year – have put up stiff resistance.

The concept of VAT, which originated in France in 1955 and has since been adopted by more than a hundred countries. Some of them also experienced the kind of opposition that India is now facing thanks to having a federal structure.

In the United States for example, VAT was resisted for years because it was felt that the federal government would usurp the power of states to raise money through taxation on sales.

Implementation of VAT in Indonesia and Thailand are regarded as success stories due to careful planning and the employment of a simple system of record keeping, tax rates and tax administration leading to high compliance levels.

In India, the failure to get the states to get moving on VAT is not only due to collusive corruption but also because of non-cooperation by buyers of goods, who rarely ask for bills and often has some benefit passed on by ‘friendly’ retailers.

The central government is, rather belatedly, planning to launch a massive advertisement campaign, urging people to insist on bills when they make purchases and also educating on how it will go towards a better system.

Not all industry supports VAT, for instance the diamond-cutting and polishing industry which functions out of the western state of Gujarat known for its economic lawlessness.

In the days before Apr. 1, the Surat Diamond Association (SDA) petitioned the government demanding exemption for the industry on the grounds that it would create problems for an export-oriented industry and make it less competitive.

According to SDA spokesman Pravin Nanavati, the industry exports diamonds worth eight billion dollars annually and ”implementation of VAT would lead to unnecessary problems”.

Ninety percent of the diamonds that are cut and polished in the world are processed in India, but the trade has also been associated with money laundering and India’s large parallel economy that built on money the taxman has no access to.

According to Ramesh Chandra, member secretary of the special committee on VAT comprising the finance ministers of all the states, traders in the country have simply got too used to evasion through underreporting of actual sales.

VAT, he said, will ensure that all parties, wholesalers and retailers pay tax or else the retailer will end up paying the entire tax.

Under the new system, a retailer may deduct from his tax liability tax that has already paid by a wholesaler – but only if he can provide proof thus making the system self-policing.

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