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CAG study: Evasion lead to deceleration in VAT revenues
December, 20th 2010

Amid states claim that switch over to VAT has resulted in substantial growth of revenues, government auditor CAG has found tax evasion leading to deceleration in tax receipts in many states post VAT, that is touted as predecessor of proposed national-level GST. Lacunae like deviation from agreed rates have also come into light in a study report compiled from Accountants General of 23 states and deficiencies noticed in other compliance audit exercises.

This prompted CAG core team, that conducted the study, to recommend that a mechanism should also be installed to monitor any deviations from GST rate, that could distort the national-level indirect tax system, implementation of which has seen delay of two years from the original schedule.

"Of the 23 states in our study, we found that ten states have registered a dip in the average growth of revenue during the post-VAT regime against those relating to the pre-VAT periods," said the study, that covered a period between April 2005 and March 2009. These states included a few of the major states like Gujarat and Tamil Nadu. "Since there has been a quantum increase in tax base in all the states after implementation of VAT, the decelerations can mainly be attributed to tax evasion," the study said.

It added there has been a downturn in the growth rate of collection post-implementation of VAT in 12 out of 23 states, in three states it registered an increase and in the remaining eight states the growth rate was inconsistent.

The Empowered Committee of state finance ministers on VAT has been saying that VAT has resulted in very good revenue growth. In fact, committee chairman Asim Dasgupta had said recently, "VAT collections registered a 30 per cent growth during the first seven months of this fiscal."

But is this growth a result of wider base of VAT compared to sales tax or improved compliance? CAG has something to say on this. "Other things being equal, VAT must lead to mopping up of revenue simply because VAT is invariably broader than the taxes which it replaces," the study said.

On uniform tax rates, which was one of the main purposes of VAT, the study said, "the states are tweaking the rates on their whims, thus creating distortions." It said there were significant variations between the tax rates of same commodities across the states and even after lapse of 4 years, the issue still remains unresolved. This prompted the study to recommend,"install a mechanism to monitor any deviations in the GST that distort the GST."

VAT, that replaced sales tax from April 1, 2005, in most states before all states adopted it, was supposed to cover 550 goods, of which 46 goods are exempted, 270 items are to be taxed at 4 per cent and the remaining commodities at 12.5 per cent. The Centre has proposed three rates of GST, whose fate hangs in balance because of differences between the states and the Union Government.

The proposal said goods should be levied at 6 per cent (each by the Centre and the states) and 10 per cent, while services at 8 per cent. The differences between the Centre and the states, first over the structure, and now over the Constitution amendment bill has already led to missing of original deadline of April 1, 2010. After this, the Centre said it would make efforts to implement it from April 1, 2011.

Recently, Finance Minister Pranab Mukherjee had said he would desire GST to be implement along with Direct Taxes Code from April 1, 2012. While VAT is a state level tax, GST would be imposed both by the Centre and the states on common goods and services and would replace VAT, as well as excise duty and service tax at the Centre.

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