Uttar Pradesh, which was the last state holding out against the introduction of a value-added tax (VAT), is set to relent and finally make the transition.
The regime change in the state, following the election of the Mayawati-led Bahujan Samaj Party (BSP) government last month after her party secured an absolute majority, has brightened the chances of UP abolishing sales tax and replacing it with VAT. Though officially there is still no word on it, local administration, industry and traders are expecting an announcement in the state budget due within the next few weeks.
Trade tax commissioner Shankar Aggarwal, who is based here, said committees were in place to revise the draft VAT Act, which was first put together five years ago, well before the other states came out with their VAT Acts.
Besides the Act, Aggarwal said, work was on to finalize the manuals of procedures, rules and regulations. Presentations have also been made to the key officers to apprise them of the new system.
VAT, which replaces the existing sales tax and other sundry taxes, will be a multi-point levy, but will avoid a cascading effect by permitting input taxes to be set off at each stage.
There are about 2,000 gazetted trade tax officers and a total staff of more than 12,000 across the state. Aggarwal was confident that UP could migrate to the new tax regime within two months of an official directive.
The switchover would affect nearly five lakh traders and manufacturers. Aggarwal estimates that once VAT is implemented, the tax net would widen by nearly 20%.
“Even if we implement VAT by October, I believe the trade tax collection for the year ending March 2008 will rise by Rs1,000 crore to Rs18,000 crore, despite a slight dip in the first two-three months,” said Aggarwal.
At present, with the Union territory of Puducherry all set to implement VAT, all states, with the exception of UP, will have migrated to the new tax regime by 1 July. The two union territories of Andaman & Nicobar Islands and Lakshadweep will, however, still remain out of the ambit of both sales tax and VAT.
“The implementation of VAT has been politicized in UP right from the beginning,” said A.K. Singh, director of the Lucknow-based Giri Institute of Development Studies.
“Both the Samajwadi Party (SP) and the Bharatiya Janata Party (BJP) before it resisted VAT because the traders opposed it. The BSP has no such political compulsion as it is backed mainly by Dalits and Brahmins, who don’t have a significant presence among traders.”
Besides that, chief minister Mayawati enjoys a cordial relationship with the Centre, which counts the implementation of VAT across the country among its key achievements and is keen that UP should fall in line.
With the political leadership still mum on the subject, there is an air of uncertainty. In the state capital while industry is expectant, traders are apprehensive, and the administration is anxious to ensure a smooth transition.
Traders’ leader Banwari Lal Kanchhal, who was economic adviser to SP’s Mulayam Singh Yadav before becoming a Rajya Sabha member, cites rising revenue collections as proof that the state only gained by resisting VAT.
Trade tax collections rose from Rs7,651 crore in 2003-04, when Yadav’s SP-led coalition government took over, to Rs14,040 crore in 2006-07.
Industry, on the other hand, is waiting for VAT with bated breath.
“We have been strongly advocating that UP should not stand in the way of achieving a uniform tax structure in the country,” said Deepak Malik, chairman of the UP state council of the Confederation of Indian Industry. “The industry in UP just cannot compete with the neighbouring states without parity in taxation.”
Indian Industries Association, the largest industry body in UP with around 6,000 members representing medium and small enterprises, is just as keen. D.S. Verma, executive director, said the association had been lobbying for the switch right from the time when the idea was first mooted.
According to him, the association was doing so even before the conference of the Union finance minister and the state chief ministers in November 1999, where the decision was taken to eventually migrate to VAT. On the recommendation of the chief ministers, an empowered committee of state finance ministers was constituted in July 2000. This committee, in its meeting in June 2004, decided to introduce VAT all over the country from April 2005.
Not all states and Union territories queued up to join the system from the first day. However, when Tamil Nadu ushered in the new regime on 1 January 2007, only UP and Puducherry were left out.
Experts said industry was justified in its demand as VAT was a more logical system of taxation, since it didn’t impose tax on tax, which led to cascading taxation.
“Take a pair of shoes,” explained R. Kavita Rao, an expert on VAT at the Delhi-based National Institute of Public Finance and Policy. “The leather is taxed, so is the machinery and all other inputs that go into the making of the pair of shoes. If the inputs have been taxed at Rs50 and the finished product is taxed at Rs200, the input tax is deducted from the tax on the finished product. So, the tax due to the government is Rs150 and not Rs200 as in the sales tax system.”
Rao said UP would be worse off without VAT, even as it remained to be seen how much better it could fare under the new system. “It is far more lucrative for a manufacturer in UP to set up a plant in neighbouring Haryana, where set-offs or input credits are available, and continue to sell in UP as well,” said Rao, “The state government has simply undermined the competence of its manufacturing zones by refusing to implement VAT. Industry will simply operate from elsewhere.”
The compelling logic notwithstanding, traders across Lucknow remain wary of the new regime.
Kishinchand Bhambhwani, president of the Hazratganj traders association, spoke for the overwhelming majority when he said the traders were dead against VAT. “The tax authorities are yet to come up with satisfactory answers to some of our key questions, which we keep asking them. For instance, what happens in case of damaged consignments and returned goods? How do we get tax refunds on those goods?”
Bhambhwani claims VAT would lead to more corruption. “VAT involves a cumbersome procedure and there is too much discretion with the tax officers, which can only lead to more corruption. So, traders in turn, will be forced to turn corrupt themselves.”
Even as officials promised to iron out the glitches in the draft Act, traders remain unconvinced. While there is a broad uniformity in the VAT rates levied across the country, the states retain the right to choose the goods to be placed in the 1%, 4% and 12.5% slabs. UP’s sugar and textiles industries will not be affected by the switch to VAT as these goods are taxed at 3% under the Central sales tax.
Sushil H. Gurnani, proprietor of Sugnamal Sarees in Aminabad, said the move nonetheless spelt trouble for the traders, especially owners of small shops. “Not all of us are educated or wealthy enough to either manage the complex accounting required for VAT or employ dedicated accountants to do the job for us. We will have to spend more time and money for not only maintaining the accounts, but also for keeping greedy inspectors at bay. Availing the input tax credit won’t be a simple affair,” he adds.
According to the Census of India 2001, UP’s literacy rate, at 57.36%, lags the national average of 65.38%.
Gurnani is a rare trader as he turned out to be the only one among more than two dozen shopkeepers who expressed apprehension and anguish at VAT, and also agreed to be identified in a newspaper story. As a general store owner in Hazratganj put it, “Who would want to rub the new government on the wrong side?”
A wizened drugstore owner on Vidhan Sabha Marg said wryly, “Should I spend time running my business or learning newfangled systems of taxation? But if the government decides to go for it, I will have no choice.”
Gaurav Prakash, a 30-year-old commerce graduate who runs Universal Booksellers in the posh Gomti Nagar, was more enthusiastic about the impending change. “VAT has to be implemented as UP can’t be competitive otherwise. UP can’t exist in isolation. Of course, maintaining records will become more tedious now. All our billing formats will change. But if the other states have done it, so can we.”
Not all traders are as educated as Prakash, though, and unlike Universal Booksellers, most of them haven’t installed computers either.
And as Arvind Mohan, a Lucknow-based economist cautioned, “Ultimately, implementation of VAT will have to be a political decision. Traders in UP will accept it just as their counterparts elsewhere in the country.”