The Centre wanted to introduce Value Added Tax (VAT) system all over the country from April 1, 2003. But this important milestone has crossed the set deadline date and still the country is speaking in different languages on this issue. VAT is a uniform taxation system, which is a state-level indirect tax, that would replace sales tax and other local taxes.

VAT, No doubt, is a part of the major overhauling of the indirect tax structure initiated by the Centre as part of streamlining and strengthening our economy. The main intention behind introducing VAT is to make India truly an uniform market. It would also help in streamlining the State finances. With uniform taxation system like VAT, unhealthy tax war amongst states would disappear. Then , why is this opposition to VAT? The State governments initially were apprehensive about the loss of revenue. It would be true only in the initial years of VAT implementation and in the long run it would increase the revenue for States. However, the Centre announced that it would compensate for the temporary losses to the States. But, the trade and industry is still not supportive of this new system. Their fear is mainly driven by the lack of understanding of the system and the uncertainty associated with it. The trade and industry is wary of the new regime and tax administration. The VAT system also necessitated certain legislative changes especially concerning the inter-State sales. Of course, once the system sets in, it would be more easy and superior to the existing tax system. This will be a simpler and transparent system and there won't be multiple taxations for the same product.

The compensation package for the States in the post-VAT regime era would be: 100 per cent in the first year (2003-04), 75 per cent the next year and to 50 per cent in the third year. The logic for this compensation package is that the States would be able to come to terms with the nuances of VAT in a relatively short time. It is also expected that States would be able to tap new sources for revenue increase. For the first time State Governments would be empowered to tax certain services as well as sugar, textiles and tobacco. Because of this it is feared that the textile, tobacco and sugar industry would suffer due to hiked tax after the introduction of VAT. It is also feared that FMCG products would cost more than now especially when it is made in centralized locations and sold across the entire country.

The Centre and the States as agreed earlier should pass a package of legislations. In order for the successful implementation of VAT, the Central Sales Tax has to be phased out over a period of three years. The existing State laws relating to sales tax, turnover tax, purchase tax must be replaced by a simple VAT legislation. It is also decided that there would be only two basic rates of tax -10 and 12.5 per cent. There will be uniformity across the States.

....To be continued