The
outcome of the 2004 Lok Sabha elections is a categorical
rejection on the part of the Indian electorate of
both religious bigotry and blatant anti-poor economic
measures passing as 'reforms'. There is however a
third dimension to the verdict: it marks the emergence
of regional parties and others with a strong regional
base as entities as powerful as the two major national
parties. The proportion of total votes cast for these
other parties is about the same as that polled by
the Congress and the BJP together. The electorate
has given a clear signal that regional aspirations
must be speedily fulfilled; otherwise the integrity
of the polity itself could be in danger.
To
honour this mandate, the Common Minimum Programme,
drawn up by the new government should have included
a straightforward recommendation for a realigning
of Centre-State relations in favour of the States,
including suggestions for a drastic revision of the
existing financial relations. Unfortunately, the CMP
does not mention any such agenda, except the promise
to set up another time-consuming commission to go
into the matter. Even more intriguing, one of the
first tasks the CMP has assigned for the new government
is the introduction of a nation-wide Value Added Tax,
a number of steps have already been initiated towards
this effect.
This is certainly cause for concern, for the Value
Added Tax actually aims to replace sales taxation,
the main revenue-raising instrument at the disposal
of State governments. As it is, the States are currently
under heavy financial crunch. The Constitution does
not entitle them to levy either income tax or corporation
tax or wealth tax. They have no right to determine
either the rates structure or procedures relating
to excise duty imposed at the point of production
of goods and services. They cannot levy import and
export duties. All these prerogatives belong to the
Centre. The States, besides, cannot raise money from
the market without permission of the Centre. They
cannot have recourse to the printing press in the
manner the Centre can. All that the States enjoy is
the right to levy sales and purchase taxes, and such
other minor levies as amusement tax, road tax or excise
duty on liquor. They are allowed to tax agriculture.
But, given the level of rural poverty, such taxation
is of extremely limited potential. For most States,
roughly between one-half to two-thirds of total revenues
accruing to them come from sales taxation. The proposal
to scarp sales tax and substitute it by the Value
Added Tax is therefore prima facie a further encroachment
on their financial rights. Because of their very narrow
resource-raising base, the States have been compelled
to borrow heavily from the Union government, the burden
of which is staggering. It could be an impossible
situation if they are now asked to give up the right
to levy sales tax and substitute it by a Centrally-directed
levy whose revenue prospects are indeterminate at
this point of time.
Sales tax and Value Added Tax are distinct from each
other. The former is an impost on the sale of a commodity
or service at the point of sale. In contrast, VAT
is a levy on goods and services which is related to
the value of the product or service even as it increases
at each stage of production. These technicalities
apart, sales tax is specifically listed in the Constitution
as a prerogative of the States, while VAT is not mentioned
at all. An impression has been sought to be created
that whatever is now being done is at the initiative
of the State governments and in accordance with the
unanimous decision of State finance ministers reportedly
reached at a meeting presided over by the Union Finance
Minister in 1999. This is a travesty of facts; the
initiative has come from New Delhi. The so-called
empowerment committee of State finance ministers,
which is supposed to be looking after the entire matter,
is nominated by the Union finance minister, its secretariat
has been set up by the Ministry of Finance, the proposed
framework of Value Added Tax with uniform rates of
taxation for different categories of goods and services
all over the country and uniform procedures for administering
the tax has been crafted by the Centre.
Why is this anxiety to rob the States of their right
to impose sales tax and substitute it by VAT? The
VAT is a dream child of the World Bank and the International
Monetary Fund, and is regarded by them as an important
adjunct of 'economic reforms'. There is here an identity
in the points of view of the Washington institutions
and those held by representatives of industry, that
is, by the capitalist class: they both want India
to be an integrated market so that capitalist enterprise
can flourish without any let or hindrance. Just as
there is a single, Centre-imposed and Centre-administered
excise duty at the point of production, industrialists
are keen to have a similar single, Centre-administered
tax at the point of distribution too. VAT fits the
bill: once it is uniformly applied all over the country,
a national market, it is fondly hoped, will emerge
for all goods and services; there will be no bother
of separate rates of taxes for the same commodity
in different States, nor the irritant of observing
different procedures and of differences in definitions
and terms. An additional factor swaying the attitude
of industrialists is perhaps the belief that, in the
case of VAT, they have to deal with only one authority,
while sales taxation involves negotiating at various
levels.
The prosperity that has visited West Europe subsequent
to the cross-over to VAT is cited in this connection.
On the other hand, the world's leading capitalist
country, the United States, has proved that there
can be life even without VAT: there, the concern for
preservation of States' rights has smothered all other
considerations. In Canada too, French-speaking Quebec
has stayed away from the Value Added Tax embraced
by the other provinces. Moreover, traders as a class
are wary of VAT, mostly because of the kind of detailed
accounts compliance that the tax calls for. Small
traders in particular - and not necessarily only the
dishonest ones - fear difficulties in the maintenance
of proper books.
Whatever the conceivable gains or losses to industrialists
and/or traders, in the Indian context the States are
likely to lose from the introduction of VAT. Apart
from the fact that the States will in the process
be deprived of their major tax instrument --- sales
taxation --- they will also face other problems. The
States constituting the Union of India are at disparate
stages of development. They have varying structures
of production and different patterns of consumption.
Some States may need to encourage industries in the
State by dangling a lower level of sales taxes to
entrepreneurs compared to what prevails in other States,
or they may want to discourage the consumption of
certain commodities by raising the rates of sales
tax. This weapon will no longer be available to them.
Those who advocate VAT because it will, they believe,
lead to market perfection, are at best an optimistic
lot. Varying rates of sales tax are not the only impediment
keeping India from the paradise of an integrated market.
Even if sales taxation is abolished, curtails and
monopolies will remain, inequalities in income and
assets distribution will persist, and so too other
obstacles to the free flow of goods, services, labour
and capital from one part of the country to another.
Nor should we forget the Constitutional issues that
are involved. The States on their own cannot abolition
sales taxation; nor can the Centre. That is possible
only if a Constitutional amendment is passed. The
enthusiasts for VAT obviously want to avoid that route.
The Centre has instead advised the States to have
recourse to a subterfuge. They have been urged to
each pass enabling legislation in their respective
legislature with the objective of replacing the existing
system of sales tax with the Value Added Tax. The
procedure proposed in the body of the legislation
is however to amend the existing sales tax legislation.
It is doubtful whether such a procedure will be considered
as legally valid in a court of law.
The preferred and wiser alternative would have been
a Constitutional amendment abolishing sales taxation
and removing it from the State list, at the same time
introducing the Value Added Tax in the Union list.
Whether there will be enough support for such an amendment
amongst the States is doubtful; for then, the issue
of abridgement of States' rights would be glaringly
brought into the open. Even if such a Constitutional
amendment were enacted, given the precedent of Kesavanand
Bharati, its validity too could be questioned, since,
some will say, it damages basic structure of the Constitution.
All told, the proposal to go ahead with the Value
Added Tax is a retrograde measure and deserves to
be resisted. The priority in the fiscal sphere should
rather be on liberating the State governments from
the huge loan burden they at present carry.
