FINANCE-INDIA: Powerful Lobbies Still Resist Value-added Tax Laws

By Ranjit Devraj Reprint | | Print |

Ranjit Devraj

NEW DELHI, Apr 26 2003 (IPS) - A key piece of tax reform in India continues to come up against stiff resistance by powerful lobbies, including those within the ruling Bharatiya Janata Party (BJP) that is known for its proximity to small traders.

This week, Union Finance Minister Jaswant Singh was forced to admit in Parliament that he may have to postpone once again revised plans to introduce value-added tax (VAT) from Jun. 1, because of lack of cooperation from state governments.

”VAT is an important initiative, which must not and cannot be defeated through faulty, patchwork implementation,” Singh said.

Aimed at cleaning up a notoriously leaky and corrupt system of taxing goods and making taxation uniform across the vast country, VAT was set to have been implemented from Apr. 1. This, however, was thwarted by a crippling, two-day nationwide strike by traders.

According to Singh, so far only eight of India’s 27 states have put in place VAT-enabling legislation. Still, that is an improvement from Apr. 1, when only northern Haryana state was ready for the new tax.

What Singh avoided mentioning was that important members of his own BJP have been speaking out against VAT, starting with party spokesman Vijay Kumar Malhotra. ”We want implementation to be kept at abeyance till 2005,” Malhotra said on Thursday.

Because the BJP-led coalition government is due to call general elections in 2004 and faces a slew of elections in important states this year, it is unlikely to do anything that might antagonise its constituency of small traders.

In recent reports, the International Monetary Fund (IMF) has suggested that the introduction of globally accepted tax administrative systems such as VAT would help India integrate better with the World Trade Organisation (WTO) regime.

Also, according to an U.S. Export-Import Bank study, Indian exporters suffer from a 16 percent disability when compared to their foreign counterparts because of the absence of VAT as well as because of inadequate financing and infrastructure bottlenecks.

Though unspoken, the main issue seems to be the fact that the new law may result in many more traders being brought under the taxation net, because VAT is applied at every stage of value addition on goods rather than at the final point when it is sold to the consumer.

According to Rajani Varma, an administrator who heads the public sector Delhi State Industrial Development Corp, the introduction of VAT would result in ”a large number of new entrants into the tax net”.

After the nationwide strike by traders on Mar. 31 and Apr. 1, the Indian government promised to raise the tax exemption limit to those traders who had an annual turnover of more than 100,000 U.S. dollars.

”We calculated that at that level, the majority of small traders would fall outside the VAT net,” said Ashim Dasgupta, West Bengal state’s finance minister and chairman of an inter-state panel charged with national implementation of the new tax regime.

For their part, traders fear that the introduction of VAT would unleash on them an army of corrupt officials who would extract their pound of flesh at every turn.

Said Tarun Arora, a plastic goods dealer in Delhi’s busy Lajpat Nagar market, famed for its consumer goods: ”We have nothing against paying tax but we don’t want to end up paying both the tax as well as money under the table to corrupt officials.”

Arora said the paperwork involved in the VAT system would be time-consuming. Worse, it would result in his having to pay more to chartered accountants, who already take a bite out of his profits by fixing his income tax so that he pays less than the 40 percent the government demands at his level of income.

”The opposition is to the paperwork and the possible harassment from petty tax officials,” agrees P N Vijay, who is convenor of the BJP Central Economic Cell, a think tank of the ruling party.

Vijay suggests a drastic lowering of the taxation threshold, even beyond that suggested by Dasgupta’s inter-state panel and ‘file-and-forget’ provisions for the first five years that would take away genuine fears of harassment.

According to Vijay, the present system of sales tax allows up to 50 percent of revenues that are due to state governments to be evaded by the traders. Total annual sales tax collections from all the states now total 17 billion dollars.

The opposition to VAT is stiffest in Delhi state, which houses the national capital and is northern India’s biggest trading hub. Here, traders pay four billion dollars annually as sales tax – but evade a like amount.

Delhi is ruled by the BJP’s arch political rival, the Congress party. The local units of the two political formations are frantically vying with each other to be seen as opposing implementation of VAT owing to the fact that the state is slated to elect a new assembly in November.

The finance minister of Delhi state, Mahinder Singh Saathi, has taken to staying away from the inter-state committee on VAT as a sign that the state is not prepared to implement VAT on the new Jun. 1 deadline, which is uncomfortably close to the provincial polls.

Saathi has accused the BJP-led central government of directing state governments to pull its chestnuts out of the fire by implementing VAT, while egging on Delhi’s powerful traders’ lobbies to oppose the new tax regime.

”We are not going to fall for that game and we may as well wait until after the November elections to the state assembly elections,” Saathi said.