Vat, we worry?

A unified Vat regime will go a long way in making the country a unified common market in economic terms. It has also helped create a more transparent tax regime and increased the efficiency of tax collection.

The decision of five BJP-ruled states to come aboard the Value-Added Tax (Vat) regime should not be viewed in purely political terms. In fact, their protestations of ‘sacrificing’ state interests for a larger cause can be interpreted more as making political virtue out of an economic necessity. Their delay in joining other states that have already implemented Vat could undoubtedly be attributed to political motives. However, a year down the line, the experience of most Vat states has been, by and large, positive. The central sales tax has already been cut to 2 per cent, but one of the principal criticisms of Vat — that it would affect revenues of state governments — has proved to be largely groundless.

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In fact, the opposite has happened. Revenues have been buoyant, so much so that the special fund created to compensate states for revenue losses has not been fully utilised. A unified Vat regime will go a long way in making the country a unified common market in economic terms. It has also helped create a more transparent tax regime and increased the efficiency of tax collection, while removing several instances of double taxation and the cascading effect of taxes on taxes. While organised industry had always been in favour of Vat, the trading sector had not. But a transparent system of tax only on the value added at each stage — from raw material to finished product in the hands of the end customer — leads to greater efficiency and competitiveness. Undoubtedly, the changed stance of the influential trader lobby has been a key cause of the BJP’s changed position.

This leaves SP-ruled Uttar Pradesh and Jayalalithaa’s Tamil Nadu in potentially ruinous isolation. There is no economic rationale for their refusal to fall in line, except sheer political cussedness. Organised industry will be troubled by broken Vat chains and will be forced to keep parallel reporting systems. Trade is likely to be diverted or illegally re-routed via the most tax-friendly route, leading to precisely the effect these states have advanced as the ostensible reason for opting out — a fall in tax collections and making local trade and industry less competitive. It is time our politicians realised that in a globalising nation, economic realities have to be factored into electoral dynamics.