Volume 6, No. 4, April 2005

It was not the consumers who came to the streets opposing the implementation of Value Added Tax (VAT) as they are still quite in the dark about the consequences of VAT. It is not the protagonists of the federal structure who mobilized the people to raise their voice against the VAT. Rather it is the traders who registered their strong opposition to VAT. There were strikes all over the country by the traders. That the implementation of VAT has been deferred until now is only due to the opposition of the traders’ lobby. Brushing aside this opposition, the ruling classes are determined to go ahead with the implementation of VAT to please their masters. The so-called Empowered Committee, headed by none other than Ashim Kumar Dasgupta, the CPM Finance Minister of West Bengal, has submitted a white paper on VAT giving the green signal for its implementation from April 1, 2005. VAT, which was scheduled to be implemented throughout the country from April, 2001, has been repeatedly deferred not because of the people’s opposition but because of the inability of the ruling classes in arriving at a consensus. Now it seems a consensus has emerged and most of the ruling class parties are now supporting VAT implementation. The so-called ‘left’ parliamentary parties like CPI (M), CPI and their allies who pose themselves as ardent champions of the federal structure, have not only accepted the implementation of VAT but they emerged as the most vocal supporters in spite of the strong unitary features that undermines the authority of the states to levy and collect taxes at the state level. VAT, which was in the form of a proposal until now, is finally becoming a reality from the next financial year.

Like every other reform, the ruling classes are talking only about the positive aspects of this dangerous tax reform, which will have a bearing on every commodity in the country. They are cleverly suppressing the serious consequences of this sweeping legislation. The Government, which is spending so much in organizing seminars, meetings and publishing so much literature to win the support of the trading and manufacturing community is not doing anything to apprise the people as to who will be paying for its implementation.

It was Manmohan Singh, the then union finance minister, who first placed the proposal for the introduction of VAT, replacing the state sales taxes. In 1993 in his budget speech, Manmohan Singh argued in favor of VAT and expressed his concern about furthering the progress of liberalization programmes introduced by him without this. He clearly stated that the programme to liberalize the economy could not be accomplished without the introduction of VAT. Manmohan Singh, the so-called ‘left’ economist, while muting the idea was simply following the dictat of the IMF/World Bank.

Later it was the top IMF official, Parthasarthi Shome, who has been the chief imperialist hachetman in India to push through VAT. Employed with the IMF since 1983 this man has been involved in destabalising Latin American economies in a big way, and was directly involved in pushing through VAT in Brazil. In May 2001 Shome chaired an expert group on tax policy and administration, which concretely planned for a "national integrated VAT". He has said that the main priority of the Indian government must be expansion of the tax net in the country. Since then, it is he who has played a major behind-the-scene role in pushing VAT through.

So to understand VAT one must start with the interests of the imperialists in pushing this Act. Tax reforms are an integral part of the liberalization process. The thrust of our Tax Reforms is to reduce the direct taxes like Income Tax, Corporate Tax, Customs Duty etc., to relieve the burden on the rich people and increase the indirect taxes like sales tax, turnover tax etc. to raise the burden on common people. The ultimate objective of these reforms is to open all the gates of the Indian Economy and make it an integral part of the world market. The proposed introduction of VAT from April 1, 2005 is an important step in this direction.

Though the efforts to introduce VAT started in the early nineties, the state governments did not show that much interest in the beginning and they considered the introduction of VAT as an effort of the center to undermine the fiscal authority of the state. In spite of reticence of the state governments, the center continued to pursue it, as was directed by the World Trade Organization (WTO), that every member country would have to implement a uniform VAT throughout the country by 2005. It is this compulsion, which made all States fall in line. The White Paper by the Empowered Committee of State Finance Ministers, which is supposedly an outcome of protracted discussions with all the states is nothing but what international capital expects from the Indian market. The objective of VAT as mentioned in the White Paper is to remove all barriers to inter-state trade and commerce and create a unified national market. Its further aim is to raise the quantam of tax from the ordinary people while leaving big business untouched and thereby reduce the budget (fiscal) deficit. [The Kelkar report states that its aim is to raise the tax/GDP ratio from the existing 9% to roughly 17%.] It also talked about the cascading effect of various taxes and unhealthy Sales Tax rate "war" among the states. But its objective is to turn India into a single unified market to facilitate imperialist/comprador big bourgeois plunder.

The Value Added Tax (VAT) is based on the value addition to the goods. It involves taxing output at every stage. However it provides for the set-off for tax paid earlier through the concept of input tax credit. This input tax credit means setting off the amount of input tax against the output tax liability. With offsetting of tax on inputs against the tax on output, VAT does away with tax on tax i.e. the cascading effect of tax. But this claim of the FM is hollow as most commodities face a one-point sales tax — on the first sale. Claiming input tax credit under VAT requires proper invoicing and documentation at every stage. In this way it is expected to encourage disclosure of complete information on business turnover. This system is based on the self-assessment and there is a built in check in the system, which will result in automatic compliance from everyone. Implementation of VAT, will widen the tax net and will help increase revenue. With the introduction of VAT both the retailers and wholesalers will have to pay sales tax. Moreover, they will have to ensure that the person from whom they purchase the goods, has paid tax. Otherwise, they have to shoulder the entire tax burden. To avoid this extra burden they will have to collect valid records from whom they purchase the goods. Thus this system is a self-policing one, as it is claimed. Consequently it is assumed that with the introduction of VAT, the tax net will be widened and that will help increase revenue for the state.

Some of the advantages being projected by the proponents are:

* a set off will be given for input tax as well as tax paid on previous purchases

* other taxes such as turnover tax, surcharge, additional surcharge etc., will be abolished

* over all tax burden will be rationalized

* prices will in general fall

* there will be self-assessment by dealers

* transparency will increase

* there will be higher revenue growth

The VAT will be implemented replacing state sales tax and some other taxes, eg. work contract tax, lease tax, turnover tax and luxury tax. But they will have to pay other taxes such as octroi, central sales tax (CST), service tax and excise duties. What is going to be implemented as VAT in India, is not a full fledged destination-based VAT. It is not ‘a tax to unify all taxes’. The proposed VAT, which is a distorted one, will nullify many of its declared aims.

Inter-state movement of inputs will be taxed. This means those companies who buy inputs within a state, will enjoy better advantage than those companies who have to buy their inputs from other states. This is going against the very purpose of VAT, ie. a common market for the whole of India. The proposed VAT that the sates have agreed to implement, is based on consensus. It is not a perfect one. Ramesh Chandra, member secretary of the Empowered Committee on VAT, also, holds the same opinion, but believes that the govt. will gradually advance towards a unified VAT. He states "Let there be no doubt that this is only a first step towards the final journey of single unified VAT."

For making it simple let us consider a manufacturer who buys raw material worth 1,00,000/- on which 4,000/- (at 4%) tax is paid. If his sales are 2,00,000/- and his VAT liability on sales is 24,000 (at 12%), then he can adjust the tax credit of 4,000/- paid on his inputs against the tax liability on his sales so his ultimate tax liability is only 20,000/-.

From the above it seems that VAT is simple, logical and fool proof system of taxation. But it is not as simple as it looks. No commodity will reach the final consumer unless it is passed through many hands. This calculation and payments of VAT are required to be done at every level even if the activity is simply transportation and no value addition in a true sense. So if the final retailer sells the goods for Rs. 3,00,000 he will again have to pay VAT on the value added of Rs. 1,00,000 as lomg as he has invoices to show that VAT was paid on the initial 2 lakh. If he does not have this proof he will have to pay VAT on the full Rs. 3 lakhs.

In the proposed VAT only few goods such as liquor, lottery tickets, petrol, diesel, aviation turbine fuel and other motor spirit are outside VAT and will continue to be taxed under Sales Tax or any other relevant act. Under the VAT system covering about 550 goods categories, there will be only two basic rates of 4% and 12.5%, plus a specific category of tax-exempted goods and a special VAT rate 1% only on gold and silver ornaments.

Currently about 46 commodities are under the exempted category and about 270 commodities are under 4% category (including food grains, which now attracts no sales tax) and the all the remaining commodities are under the general VAT rate of 12.5%.

The biggest advantage of VAT as cited by the policy makers is that it will bring transparency because of its built in check system. It will bring out automatic compliance from the traders and reduce the tax evasion to a negligible level. In the existing system the traders generally do not maintain proper records. Underreporting of sales is very common to them, and on the basis of this under-reporting they can evade not only sales tax but also income tax. In the VAT system, it is argued that tax evasion will be minimized to a greater extent. Though this is true to a large extent it is no fool-proof formula for tax avoidance.

The experience of MODVAT (Modified Value Added Tax) introduced by the center is contrary to this. The union government had to withdraw this after the large-scale misuse of central excise tax credits. So what is the guarantee that a similar thing will not happen now.

The international experiences of VAT are also not that encouraging. The experiences of other countries where VAT was introduced, show that the VAT is also evasion-prone. In South Africa, VAT has become a ‘source of dirty money and money laundering" (VAT Monitor, July 2002). France, the inventor of VAT, has also been facing the problem of evasion. In 1981 the figure of evasion was 18.1 percent. This constituted 6.6 per cent of total revenue (EPW, May 10, 2003). The Economic and Social Committee appointed by the European Commission reported on April 25, 2001. "... VAT system provides opportunity of fraud because of the fact that goods are in circulation on which no tax is imposed. Temptation is therefore great to divert such untaxed goods on to the black market".

According to Transparency International, the Berlin-based anti-corruption organisation, India is one of the most corrupt states. In India it has been estimated that more than 40% of GDP constitute the black economy. Those who are so efficient to turn white into black to evade taxes, there is no reason to believe that they will fail to utilise VAT for the same purpose. Suresh Bindal, secretary-general of a body of textile merchants, has expressed his view that he "isn’t very hopeful about the prospects of VAT reducing tax evasion".

But what the VAT system does is that it equips the tax authorities with greater powers, which will mean even more corruption by these officials. As the VAT system has a lot of checks and one of its main aims is to widen the tax net it will be able to enforce more compliance amongst the traders. This will entail not only the payment of VAT but other taxes as well, like income tax. With a mere Rs. 5 lakh yearly sale exempted from VAT (i.e. anything over Rs. 1,500 per day) the tax authorities can harass even the smallest retailer for records. The tax officials can became a terror police for the lakhs of small traders and businessmen. The government is openly propagating that it is only the "tax-dodgers" who are opposing VAT. Haryana has already increased its revenue by 30% last year after the introduction of VAT.

Though the introduction of VAT is going to adversely affect large sections of people it is only the traders who are showing an organized protest against this. After protesting at state levels they called for an all India traders’ bandh on February 21. After the success of the bandh their all India body, Confederation of All India Traders (CAIT), which is spearheading the protest has threatened to go on an indefinite strike against VAT.

Though VAT requires the traders to maintain proper records, it is unfair to say that they are opposing the introduction of VAT only for that reason alone. Besides, the bulk of the small trades and business find it difficult to survive even now. This tax will crush them. They are also protesting against the "harsh" clauses in the VAT and the inclusion of essential commodities. The penal provisions in the proposed VAT are deliberately made harsh not with the intention of ensuring compliance from traders but to push them out of the business. They are basically meant for facilitating the entry of giant retail store chains.

To dilute the opposition for VAT from traders, small dealers with a gross annual turnover not exceeding Rs. 5 lakh are presently exempted from VAT. For those with an annual turnover not exceeding Rs 50 lakh, they are given an option either to pay VAT or gross turnover tax of 1% (which will be more than the VAT amount.) However those who opted for turnover tax will not be eligible to claim input tax credit. The Rs.5 lakh limit is ridiculously low as that would mean only those traders who have sales of about Rs.40,000 per month.

Besides, most States switched over to single-point-taxation in the 1990s (on the first sale), VAT will entail a multi-point taxation. Though all goods may not have been under this system a large proportion were. Under single point taxation, a large section of traders, especially the smaller ones, were out of the tax net. This exempted them from not just the demands of record-keeping, paper work and costs it entailed, they were also free from the arbitrary harassment of tax officials. Now, with VAT, even on the smallest of value added (say even through transport) it will attract tax. So, in the earlier scheme the bulk of the sales tax was paid by the manufacturer (i.e. on the first sale) and the traders escaped most of the burden. Now the overall tax will fall equally on the traders — both big and small. Not only that, tax officials can harass each and every trader who will be forced to keep records as very few will be able to explain that they have sales of mere Rs.40,000 per month. And even to prove this they will have to maintain proper records. So, we can have a VAT terror police roaming the lanes and by-lanes harassing even the small retailers.

After the introduction of VAT small shop keepers will not be able to comply with the documentary evidences to claim input tax rebate and they will end up in paying more tax than what they are paying now. The complicated system of VAT will force them out of the business paving way for the large retail chain outlets of MNCs.

The small traders and retail shopkeepers see a threat in the invasion of Indian markets by international giants and are fighting for their survival. Their demand to exclude essential items from the purview of VAT is a demand of the general public. Their fight against VAT, which they are fighting for their own interests and even survival should be seen as a part of the anti-imperialist struggle.

The consumers are still in the dark. They do not have proper knowledge about the consequences of the proposed VAT though the implementation of VAT will primarily affect them. The implementation of the proposed VAT would affect the consumers adversely by leading to a price-rise. VAT will be a multipoint levy and will replace sales tax. The rates of sales tax are 7 to 8 percent, whereas the rate of VAT will be 12.5 percent, in general. It means there is a straight 50 percent increase in taxes which is going to increase the return to the government. VAT at 12.5 percent is one of the highest tax rates in the world. Not only that the actual tax paid will always be on the final sales value (as all value added will be taxed at each stage of the chain), while in the earlier case most of the sales tax was on the first sale, at the point where the goods were manufactured. So, overall the tax paid by the consumer under VAT will be much higher than what is paid now.

Another important aspect is that VAT covers almost all goods. The prices of diesel, kerosene, petrol, eco-friendly CNG, other petroleum related products, rice pulses and other such essential commodities will go up after the introduction of VAT. Under VAT, the present level of 12% tax on petroleum related products will be increased to 20% and the essential items like bread, salt, spices, pulses, food grains and other related items on which there is no tax at present will come under a 4% tax slab.

Who is going to pay for this? Definitely not the traders. It will be borne by the consumers. Moreover as VAT will be a multipoint levy, the value and the rate will be higher at each subsequent higher rung which means the actual tax which consumers are going to pay is not just 12.5% but it is much more than this. There fore the introduction of VAT instead of bringing down the prices it will break the consumers back with a sharp rise in prices.

Besides, in the name of encouraging exports the tax rate on them is made zero and yet credit will be given on tax paid on inputs. This helps the exporters to make super profits.

As per the constitution by virtue of Entry 54 of the State List, State governments are empowered to levy and collect the Sales Tax. Sales tax is the major source of revenue and contributes up to about 80% of the states’ revenues. It is the constitutional right of state governments to decide the sales tax structure suitable to the specific conditions in their states. Tax rebates and additional taxes are not only important sources of revenue for the states but also an important tool in their hands to promote industries. In the name of a uniform tax structure under VAT throughout the country this basic right of the states to have their own tax structure is being snatched away. Though their revenues may not come down as the center has promised to compe-nsate the short fall of revenues but their dependence on the center will grow. After the introduction of VAT, states will be reduced to the level of municipalities whose only role would be to collect the taxes that are decided at the central level. In a large country like India with diversified features having a uniform tax structure means undermining the authority of the states.

Though VAT is now in operation in more than 120 countries, not many countries in the world with a federal structure have introduced VAT. The biggest example is America where VAT is not introduced. Another example is Canada where though VAT is introduced it is not uniform through out the country. The administration and structure of VAT across the provinces differ because of the heterogeneity among the provinces. In Canada some states like Quebec both central VAT and provincial VAT are in operation by the state; in some states like Newfoundland, Nova Scotia both Central and Provincial VAT are operated and administered by the center; in some states like Ontario both provincial and central VAT are operated by the respective governments and some states like Winnipeg which has rich natural gas have not introduced VAT at all. The European Union, which is a loose federation of countries has introduced VAT but its structure is not perfect and is currently undergoing changes. So a uniform VAT is not a universally accepted tax structure.

The purpose of the so-called Empowered Committee formed by the state governments is only to protect their revenue interests and the committee has not taken up the task to safeguard the constitutional rights of the states. As a consequence, the state governments are contended with the assurance that the center would compensate for the loss of revenue. But they are forgetting the fact that their dependence on the center will increase. And it has been agreed that to overcome the constitutional problem every state well adopt a resolution to replace the existing state sales tax by the new one (ie. VAT), mentioning this only as a change in the method of taxation.

Another aspect has been indicated by the union finance minister. That is, a patch-work VAT will not serve the purpose, so a full fledged VAT is necessary. The union govt. prompted by the imperialist forces, has been advancing towards that direction step by step. In such a case, all other taxes levied by the state govts will be rolled into VAT. This will further curb the fiscal authority of the states.

This is nothing but concealment of the true aims of VAT of robbing the state of its authority. This will go against the interest of the federal structure by strengthening the controlling power of the center. In all practical senses the centre will take charge of its implementation. It is the centre and not a body of states’ representatives, who is to be entrusted with the controlling power to decide commodity classification, rate fixation, identification of taxable items and all other matters regarding taxation. The union ministry of finance has already started this business. The states are preparing their draft following the central draft. The union ministry of finance will supervise the draft legislations of all states so that they maintain uniformity in expression and definitions of terms. Thus all the state governments, including those avowed champions of the slogan "more power to the state" have surrendered to imperialist forces via the union govt. All these parliamentary parties have once again betrayed the people who aspire to a decentralized federal India with more powers to the states.

As it was mentioned earlier the objective of VAT is neither to increase the revenues for the states nor to facilitate tax collection and nor to reduce the burden on people by eliminating the cascading effect. The single objective of VAT is to create a unified single market in the country without any trade barriers. This is a pre-requisite for fulfilling their ultimate objective of fully and totally integrating the Indian market with the global market. The imperialist and comprador big burgeois forces want removal of all impediments for economic integration of country to smoothen the expansion of their capital and the creation of a homogenous market in India for their commodities. (In fact they want to extend this even further to entire South Asia through SAFTA) It simply means further intensification of their exploitation. The implementation of a uniform VAT throughout the country serves this purpose by replacing sale tax which varies from state to state.

The other important purpose of VAT is to hike tax collection by increasing the tax on commodities and by drawing a wide net of traders and small businesses into the tax net. The Kelkar report has stressed this; so have the IMF in its obsession to reduce the budget deficit. In its recent review the World Bank ‘had stressed on the need to give utmost importance to reforms in taxation...’ (The Hindu, July 22, 2003, Delhi edition). It is clear from this that the World Bank is not happy with the present pace of progress. It wants a complete free play for the international market forces so that the expansion of imperialist capital can be facilitated further.

A unified tax structure throughout the country will facilitate the capitalists in taking their investment decisions. Once VAT is in place they no more require to have different business strategies for different states.

Another very important factor behind the introduction of VAT is the large retail market of an estimated $ 180 billion. With international capital desperately in search of new avenues for investment opportunities to tide over the severe crisis they are facing, the large retail market is an attractive destination for their investment. The Finance Ministry is already talking of allowing Foreign capital even into retailing. (In fact, today the biggest TNC in the world is a retailing chain — the American giant Wal Mart) They need the consolidation of the Indian market by outplaying the small retail traders. VAT will act as an important weapon in achieving their goal.

The union govt. has already reduced tariffs and removed import control barriers providing wide scope to imperialist forces. There is no mention of imposing internal taxes eg. VAT and service tax on imports to protect the interests of the country in the white paper on VAT. Rather in his budget proposal (2003-’04), the finance minister suggested to exclude anti-dumping duty, countervailing duty and safeguard duty, from the base of calculating additional and special additional duties on customs. These three duties are levied to protect domestic producers against imperialist dumping, subsidizaion and the sudden surge in imports. Even then, these are not enough to quench the thirst of the imperialists. The imperialist forces have been continuing to pressurize and both the union and state governments have been surrendering more and more to their pressure providing them further opportunities to intensify their exploitation.

According to a report jointly prepared by McKinsey & Company and the Confederation of Indian Industries (CII) global retail giants such as WalMart, Tesco, Kingfisher, Carrefour and Ahold are waiting in the wings to enter the Indian retail market. This report also states that the Indian retail market holds the potential of becoming a $ 300 billion (Approx Rs 13,50,000 crores) per year market in another 5 years i.e by 2010. It is this huge market which the imperialists are eyeing. The proposed VAT will help in consolidating this market for them.

In a nutshell, the proposed VAT which is scheduled to come into effect from April1, 2005 is another instrument to serve the imperialists and another weapon in their armory to exploit the vast masses. The tall claims of our policy makers about its advantages, the rosy picture they are painting and the justifications they are giving about its logical working is only to mislead the masses. Behind their massive misleading propaganda they are covering up their treacherous and exploitative motives. VAT, contrary to the claims of the ruling classes, is being introduced only to serve the imperialists and comprador big bourgeoisie. It will pave way for MNCs into the retail market, displace the small traders from their business, push up the prices of all commodities especially essential items like food grains, and deprive the states of their political fiscal authority and increase their dependence on the center.

Seeing the way all parliamentary parties without any exception (with the CPM in the lead, but with the SP still hesitant) are supporting this anti-people and pro-imperialist VAT it is evident that they all are willing to serve the imperialists with the same enthusiasm. The state governments of different political parties including the revisionist parties are competing with each other to show their commitment to push through this anti-people legislation. In these circumstances only a broad based strong anti-imperialist people’s movement is the alternative to resist this imperialist onslaught. That the consumer will be the worst hit by VAT brings out this urgency even more.

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