Opinion - Editorials   

BEHIND TRADER RESISTANCE TO VAT

ONE OF THE main factors behind the opposition to the introduction of the State-level value added tax (VAT), arising from trading sections, is that while most States switched over to a single-point taxation system in the 1990s, VAT warrants a return to multi-point taxation. Under single-point taxation, a large section of traders, especially small merchants, were out of the tax net. This exempted them from not just the demands of record-keeping, paper work, and the hours and costs these tasks entailed. More importantly, they were free from the risk of exposure to the exercise of arbitrary power during tax assessment and collection. As a consequence, one of the most important virtues of VAT — its avoidance of what is known as `escalation' or the levy of `tax on tax', leading to price increases — has not been apparent to either traders or consumers. Many traders tend to think that in the absence of taxation at multiple points of sale, the rationale for the introduction of VAT disappears.

The resort to single-point taxation as a method of dealing with official harassment and corruption was a soft option that should have been avoided. The change minimised the chances of plugging leakage of revenue by encouraging unscrupulous merchants to evade tax at the one and only point of taxation in the sales chain, through stratagems like `bill trading' and underinvoicing. This undermined revenue potential, leading to higher rates of taxation (leviable at the single point) since States needed to raise resources especially for meeting their social sector obligations in fields such as primary education and health care. A sound approach would have been to deal with various factors that increased the propensity to corruption in the multipoint system, notably the lack of transparency in rules and practices, the need for the signature of assessment officials on every single return filed by traders (which gave unscrupulous officials scope for extracting `rent' from assessees), and the opportunities for personal interface between traders and tax authorities. Such problems have been tackled with reasonable success in the case of Central excise and income-tax through methods such as the near-universalisation of self-assessment. State-level VAT ushers in this major reform, obviating the need for `routine' inspection and the official scrutiny of every single return.

Also, the VAT system creates a vested interest among traders in bringing honesty to invoicing by linking rebate of tax paid on their purchases with the tax payable on their sales. This reduces the scope for fraud and at the same time increases revenue potential by capturing the value added to commodities at every stage by way of transportation, storage, and re-sale. Trader resistance to VAT could have been minimised had policy-makers in States conducted an awareness campaign on these salient facts. For example, the campaign can highlight how the difficulties of small traders are addressed in the new system through exemptions for those with annual turnovers up to Rs. 5 lakh and optional turnover tax in lieu of VAT for those with turnovers up to Rs. 50 lakh. Such a campaign is all the more relevant because many big traders are using the fear and confusion among their smaller counterparts to thwart computerised linkage that State VAT will create between records relating to VAT, excise, and personal taxation (income tax and wealth tax). Further, some big traders are using the mobilisation of the entire trading fraternity to resist the possible opening up of retailing to foreign investment under the General Agreement on Trade in Services of the World Trade Organisation. This is an issue that needs to be tackled independently. It should not be mixed up with issues accompanying the introduction of State-level VAT.

Printer friendly page  
Send this article to Friends by E-Mail

Opinion

News: Front Page | National | Tamil Nadu | Andhra Pradesh | Karnataka | Kerala | New Delhi | Other States | International | Opinion | Business | Sport | Miscellaneous | Engagements |
Advts: Classifieds | Employment | Updates: Breaking News |

Stories in this Section

TIGHTENING THE SCREWS
BEHIND TRADER RESISTANCE TO VAT
Lessons from the poll verdict
Chileans labour past retirement
Bihar verdict
Budget 2005-06
Impact on pensioners
Father's caste

Copyright © 2005, The Hindu. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu