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Take a leaf from VAT to get GST going
November, 23rd 2013

Even as the implementation of the Goods and Services Tax (GST) looks like it's going to flounder yet again, largely on concerns raised by states about potential loss of revenues, it might be pertinent to rewind back in time, when eight years ago, almost identical concerns nearly derailed the implementation of the value added tax or VAT.

The experience of VAT, which was rolled out in stages for taxation of goods from 2005, shows that after it was implemented, the fiscal position of most states actually showed a marked improvement and based on revenue and GSDP data for 29 states between 1993-94 and 2008-09, the direct revenue impact of the VAT was reportedly found to be positive in two-thirds of the sample states. With the benefit of hindsight, we can almost conclusively infer that all the concerns that the implementation of VAT would force states to totter on the verge of bankruptcy were entirely unfounded.

The introduction of the more-comprehensive GST regime as a one-tax levy on all goods and services by the Centre and the states essentially aims at giving shape to a single national market. GST is almost synchronous with reforms in taxation of food from farm to tables. But the shortsighted opposition by the states to it are driven by political than revenue loss considerations. As a buffer of sorts, states want GST to exclude petroleum products and alcohol — which together helped them rake in close to Rs 2,00,000 crore by way of sales tax revenues last fiscal. Apart from these two products, the meeting of the Empowered Committee of State Finance Ministers in Shillong earlier this week also opposed the inclusion of entry tax and octroi within the GST framework.

The opposition comes despite the VAT experience which has proved otherwise. A tax system under which every commodity (including services where states currently do not impose levies) gets taxed on the basis of value-added at every stage boosts economic activity and so must increase revenue. Exclusion of a certain product, that too petroleum, undermines the basic fabric of the GST, which is to tax every good and service in a way that the producer at each stage of the value chain can claim credit for taxes paid on the inputs. Any break in input tax credit chain makes the whole process ineffective. The experience of VAT shows that foolproof, end-to-end GST is unlikely to undermine the revenue raising capability of states and, if implemented well, would only add to the overall revenue buoyancy.

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