Story link:



  VAT as reflected on Indian democracy

On Dec.13, in a little noticed scene befitting a climax to a slow thriller, five states announced that they will join 21 states already in the Value Added Tax [VAT] regime. 'Phew,' you ought to say, break into a big smile and applaud, but you barely noticed. Applaud you must, not these states' decision, but the majesty of Indian democracy which has wrought a consensus after five patient years during which, everyone got a chance to discharge steam, even as wise minds waited quietly. And now criticising voices have fallen silent, VAT will cover nearly the whole country and India will have cleaned up a little more.

Our story must in fact begin in the seventies when India had a tangled tax mess. Dr Shankar Acharya describes it well: "Back then, customs duties were often above 200 per cent on many products. Excise duties ranged between 2 and 100 per cent spread across 24 different rates, not counting much higher duties on tobacco and petroleum... Inputs were routinely taxed and credit on taxation of inputs was rare. So 'cascading' of taxes was the norm. Direct taxes were even more bizarre. In 1973-74, the personal income tax boasted eleven different slabs with rates ranging from 10 to 85 per cent."

In Acharya's review of the 30 years since then, we find politically incompatible personalities like V P Singh, Manmohan Singh and Yashwant Sinha working steadily with a common focus on cleaning up the mess. Behind them were sharp, dedicated minds who analysed issues and devised policy for the political leadership to carry through the parliament. While some names like L K Jha, Raja Chelliah and Vijay Kelkar are well known, others like Amaresh Bagchi, Govinda Rao and Partha Shome are not. Out of such minds' collective wisdom is fair, modern governance wrought in India.

Manmohan Singh, in his deservedly celebrated five years as Finance Minister between 1991 and '96 , had rationalised customs duty, wealth, income and corporate taxes. Sinha who followed him combed out excise duties.

That left a formidable swamp called sales tax. India's sales tax system was a nightmare of exemptions and discretions. There was no standard record keeping. Each state had its own rates and the centre, one of its own. A lot of discretion was vested with numerous inspectors and that led to leakages. V P Singh's MODVAT of 1985 was a forerunner of the VAT idea but it was howled out of the scene.

What VAT aims to do is to charge tax only for value added to a product or service. Say you bought a bottle for Rs.10 and a lid for Rs.2 and each incurred a tax of 10%, a tax of Rs.1.20 had already been paid. If you then stuffed pickles in it and sold for Rs.50 you'd pay Rs.5 as a tax; but you can claim a refund of Rs.1.20 for taxes already paid. That in simple terms is VAT.

To work out these numbers for millions of transactions, an elaborate, unified record keeping system was called for. This would plug leaks, eliminate duplication of taxes, reduce prices generally, create a true common market in India, make Indian produce globally competitive, make our system mesh better with global trade, increase revenue and reduce fiscal deficit. The states and the centre would then share the revenue on a mutually discussed and agreed ratio.

On April, 2003, one of several lapsed deadlines for adoption of VAT, all hell broke lose. Traders felt threatened. It'd been a lovely party for them so far and new record keeping norms were irksome. MPs of the party in office joined the opposition in shouting down the government. "VAT wapas lo," they chanted. West Bengal announced -what else?- a bandh. Most people at large kept out of the debate because VAT was so much arcana.

Four years after the first deadline had lapsed, 21 states hesitantly adopted VAT in April this year. And the Centre stayed helpful, open and patient amidst must much reluctance. What happened then? How have five states as we saw, announced yesterday-almost unasked- that they too will adopt VAT. And why have traders gone quiet? The answers to all that is: India's democracy is a living organism and not just 'a ceremony of elections' as a vicious cynic called it.

The first step was by the Centre that nominated a special officer to counsel the states and handle their misgiving. P Chidambaram, the current Finance Minister, then announced that states will be compensated for any loss of revenue in the first three years. Traders who feared they would lose customers because of runaway prices found instead, that prices fell after an initial unevenness. Retailing in fact boomed. Enterprising software writers developed cheap packages that made VAT easy for dummies.

Most of all, states found that their revenue share grew fat, just four months into the VAT regime. Writing in the New Indian Express on Sep 15, 2005, Vikas Dhoot said, "Even Bihar has a cash surplus of Rs.3,000 crores... Some states like Kerala and Andhra Pradesh have seen an increase of Rs.100-200 crore so far." With experiences like that, was any more persuasion needed?

But this story is not about VAT but about how change comes about in India. Its diverse people cannot be worked with a prickly club imported from China, though many of our gliberati and tycoons would like that. Indians take their time, are vociferous but they are open. They observe and if convinced, they accept. That's how they have survived the millennia.