ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Perspective from Karnataka

Are We Heading Towards a Destination-Based VAT?

There will be, it has been announced, a shift from the current system of commodity taxation at the state level to value added taxation from April this year. This paper considers whether what is planned for implementation is in consonance with the core concepts of (destination-based) value added taxation and assesses the extent to which the present intiatives will lay a sound foundation for eventual modernisation of the indirect tax structure at the state level. The study has been made from the perspective of the existing commodity tax structure of Karnataka.

The chairman of the Empowered Committee of State Finance Ministers, the union finance minister and several state governments have already announced that there will be a shift from the current system of commodity taxation at the state level to value added taxation by April 2002. Radical changeover to a substantially different tax structure, particularly in respect of a fiscal source that accounts for three-quarters of the own tax revenues of states, can and should be attempted only in a series of steps carefully calibrated over a period of time. The commodity tax mechanism that is planned for the coming financial year can, therefore, bear only a faint resemblance to a full-fledged VAT or even to the modified subnational species of VAT that is possible in a federal political structure in which powers to levy commodity tax are enjoyed by state governments. What is perhaps more relevant is to ensure that transition takes place in the right direction and in the proper manner, that shift from sales taxes and related levies moves the tax incidence towards final consumers, that the path to further reform is charted clearly and that confidence and acceptance are developed in both taxpayers and tax collectors (including intermediaries like manufacturers and dealers).

The present paper considers whether what is planned for implementation by April 2002 is in consonance with the core concepts of (destination-based) value added taxation and assesses the extent to which present initiatives will lay a sound foundation for eventual modernisation of the indirect tax structure at the state-level. The study has been made from the perspective of the existing commodity tax structure of Karnataka state. It must be noted, however, that the final contours of the state level VAT proposed to be adopted in the coming financial year by different states are still unclear. States like Madhya Pradesh, West Bengal and Karnataka and the union territory of Delhi have already put their statutes on the web with the intention of seeking suggestions and feedback. The list of states committed to making the change is also not confirmed, but the union finance minister has recently announced that 12 of the 15 non-special category states will be moving to VAT from April 2002. For the purposes of this study, we have assumed that the VAT that is emerging will be in line with decisions taken so far by the Empowered Committee of State Finance Ministers. Even here, several issues that appear settled (basic ones like the number and level of floor or basic rates and exemptions and the commodity groups to which each will apply) are sometimes reopened between one meeting and the next although scarcely more than four months are left for the proposed VAT to come into effect. Whether promises made by states at Empowered Committee meetings will be fulfilled needs to be seen, since the central government is yet to play an active role in enforcing decisions taken by the Empowered Committee. All this is further clouding the existing atmosphere of uncertainty for industry and business as well as for state administrations.

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