The outcome of the 2004 Lok Sabha elections
is a categorical rejection on the part of the 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 and is about the same as that polled
by the Congress and the B J P together. The electorate have 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 straight forward recommendation
for 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 supposedly
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 fills 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: 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 of 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,
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 damaged 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.