Why is the newly introduced Value Added Tax (VAT) creating so much heartburn amongst the traders

Why is the newly introduced Value Added Tax (VAT) creating so much heartburn amongst the traders and marketmen? There is so much confusion over the fine print, assurances of replacing existing tariff regime and the probability of prices escalating due to the introduction of VAT. Let us examine each of the issue.

The traders bandh, though partially effective in some places, received wide support all over the country. First Kerala and then Maharashtra, Jharkhand and Jammu & Kashmir were completely paralysed by the bandh. The states which are going to implement VAT, mostly Congress-ruled states that have been given a stern warning by the Union Finance Ministry against playing truant, are jittery that there will be large losses in tax revenues.

For instance, Andhra Pradesh will lose about Rs 3,000 crore every year if the neighbouring Tamil Nadu decides not to implement VAT. Estimates available with Organiser state that it would be 10 to 12 per cent of the total revenue projected in the Union Budget. Will the Centre compensate for it as promised? This is because Andhra Pradesh imports a lot of goods from Maharashtra and Tamil Nadu and any move by these states to jettison VAT would lead to large-scale illegal trading in the border districts.

There will be no necessity to pay central sales tax on goods from Tamil Nadu and in the case of low volume businesses there is no need to pay VAT as the cut off is Rs five lakh turnover. Andhra Pradesh government is cagey about a situation where Tamil Nadu government reneges on its stand to implement VAT. This actually is a double whammy. So, Andhra Pradesh government has gone to the extent of making an emergency plan to salvage the situation in the event of Tamil Nadu'srefusal to implement VAT. There will be something of an entry tax levied to compensate for the loss in revenue. But more importantly, Andhra Pradesh government is deeply worried of the prospects of migration of businesses to Tamil Nadu because of lower taxes there.

But when we talked to a number of traders in Mumbai the all-pervading feeling was that the regulations could have been made better and trader-friendly so that the new regime would be more acceptable to the dealers. The Union finance ministry should also have been more sensitive to the concerns of the traders like the rules, procedures and forms developed by the states. One of the most often-heard complaint is that the new VAT regime would lead to inspector raj. The fear of the traders is not misplaced. It is necessary to provide transparency and objective assessment methods so that the tax officials do not have any discretionary powers.

In the middle of all these there are several changes in the VAT law. The states have been given the flexibility to fix the turnover threshold for VAT exemption at Rs 10-lakh, instead of Rs five lakh. But the states will not be compensated for the resultant revenue loss. Composite tax rate for traders within the turnover range of Rs 10 lakh to Rs 50-lakh can be lower than one per cent prescribed earlier, and as low as 0.25 per cent. This would mean that more than half the traders in most states will be out of the ambit of VAT as their yearly turnover will never be as high as Rs 50 lakh.

Another big hurdle was the phasing out of the existing sales tax in consonance with the introduction of the VAT. But on Thursday the state finance ministers got Centre'sconcurrence for central sales tax phase out. ??What is the point??, said a trader in Kalbadevi in exasperation. If the BJP ruled states have chosen to boycott VAT they have good reason to do so. It may be argued that VAT is the international way of taxation. But in the Indian context there are too many imponderables and the Central government does not seem to understand the gravity of the situation.