ECONOMY: Lobby Groups for Indian Traders Again Say No to VAT

By Ranjit Devraj Reprint | | Print |

Ranjit Devraj

NEW DELHI, Mar 22 2005 (IPS) - For more than a decade now, Apr. 1 which marks the beginning of the fiscal year has been celebrated as April Fool’s Day by India’s powerful traders’ lobbies that have made it their business to find ways to thwart attempts by successive central governments to usher in a national Value Added Tax (VAT) regime.

This year, states ruled by the business-friendly, Bharatiya Janata Party (BJP), which leads the opposition in national Parliament, have ganged together to announce that they are not ready to implement VAT, thereby scuttling plans for its nationwide implementation.

Finance ministers from the BJP-ruled states of western Rajasthan and Gujarat, and central Madhya Pradesh, Jharkhand and Chattisgarh met over the weekend and said the country was not yet ready for what could be sweeping reforms that form a critical component of plans to regularise retail and services.

The BJP, however, took care to say that VAT was a ”progressive tax system” and noted its own attempts to introduce it during a six-year stint in central power – that ended with an electoral upset last May which saw the Congress-party led United Progressive Alliance (UPA) emerging victorious.

Said Yashwant Sinha, finance minister in the ousted BJP government: ”There is need for clarity and unless taxpayers can obtain exemptions and set-offs easily there is bound to be confusion and chaos.”

A statement issued by the BJP said that ”at this stage, the legislative preparations made in various states are at variable stages,” and observed that it is ”unlikely that VAT can be introduced in the entire country.”

There was no explanation as to how preparations could have been worse than in earlier years when the BJP itself tried and failed to implement VAT which is expected to rationalise and improve tax collection from the manufacturing and trading community.

Two years ago, the then BJP government had laid the blame on its own failure to implement VAT to ”collusive corruption”.

The BJP’s decision not to support VAT has earned it a stinging editorial in the ‘Indian Express’ newspaper on Tuesday which called it ”pettiness of an order that raises serious questions about the BJP’s credentials as a modern party with a reform-minded outlook and an ethical foundation.”

”This important taxation reform is the first step towards a single tax for the country – the Goods and Services Tax (GST) – that is already in place in much of the world, including our South Asian neighbours like Pakistan, Bangaldesh and Sri Lanka,” the editorial observed. The ‘Express’ also noted that the aim of VAT was to give Indian industry the same competitive advantage as industry in China, a neighbouring country that is increasingly being seen as a benchmark by India’s planners.

Thanks to narrow political rivalry it seems that India, for the foreseeable future, will have to muddle along with the existing system of sales taxes, octroi and a dozen other cumbersome levies paid on goods moving past checkpoints on inter-state borders that are far stricter than say between the countries that form the European Union.

But P.N. Vijay, a spokesman on economic affairs for the BJP and a banker by profession has come on record saying that many Indian business are against the VAT regime because the existing sales tax system offers opportunities for evasion and corruption.

Delhi state alone earns five billion U.S. dollars from sales tax but quietly allows traders to evade at least an equal amount, in collusion with officials and representatives of political parties who share the benefits.

Earlier this month, several sales tax officers were caught on camera demanding bribes from shopkeepers by a television news channel resulting in a handful of summary sackings. Nonetheless, graft remains routine and difficult to remove because of political complicity.

The concept of VAT, originated in France in 1955 but has since been adopted by more than 100 countries.

Some of these countries with federal structures like India’s did experience similar opposition. In the U.S., 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.

The implementation of VAT in Indonesia and Thailand is regarded as a success story 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 embrace 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 gain from benefits passed on by "friendly" retailers who in turn gain from under reporting actual sales. And this results in massive revenue losses.

Failure to implement VAT will be another setback to Finance Minister P. Chidamabaram, whose Feb. 28 budget aims to check tax evasion and curb the country’s massive ‘black economy’. The budget is due to be voted upon in Parliament, currently in session.