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Disaster if VAT tariff is harmonised with HSN
March, 16th 2009

It has come to be known from an official source during a recent seminar that the Empowered Committee of Finance Ministers of States has got the VAT tariff worked out and is on the way to finalising the details on the same pattern as in the Harmonized System of Nomenclature (HSN) also known as Brussels Trade Nomenclature (BTN). I am writing to say that this will be quite a retrograde step. Making things completed and difficult to work upon is not a good policy at all.

The complication is not only because of the difference in duty between 4% and 12.5% as they are now in State VAT.    It is mainly because of the detailed classification of eight digits (such as 3304 99 50 for Turmeric preparation for make-up) that are required to be written on the invoice for VAT transactions down the line upto the retail stage.

We may now see what exactly the HSN is and how elaborate it is. The HSN is having 98 Chapters in Customs, which comes to 730 pages of a standard textbook. It has got elaborate chapter notes, section notes, exclusions, inclusions and definitions all over the tariff. Similarly, there are 87 Chapters in Central Excise printed in a 687 pages in a standard textbook. Each Chapter is highly elaborate. The Customs Tariff and Central Excise Tariff have both eight digits.

Taking customs first, (because it is  more aligned to the HSN), the Chemical chapters are written over nearly 48 pages with divisions and subdivisions using highly technical languages such as disphosphorus pentaoxide, phosphoric acid, polyphosphoric acids, whether or not chemically defined, ethers, ether-alcohols, ether-phenols, ether-alcoholphenols, alcohol peroxides, either peroxides, ketone peroxides (whether or not chemically defined), and their halogenated, sulphonated, nitrated or nitrosated derivatives. The chapter dealing with medicines described as pharmaceutical products is written over nine pages having eight digits sub-division numbering about 400 items. If a medicine is traded by a dealer he has to write either of the 400 items. Machinery chapters have descriptions spreading over 70 pages.

Even simple things such as chocolate and biscuits, or wafers containing chocolate have got two full chapters to their credit with eight digits subdivision having descriptions such as pasta containing eggs and not containing eggs, wafers and communal wafers, biscuits containing chocolate and coated with chocolate, biscuits not otherwise specified, extruded or expanded products, savoury or salted. Why complicate matters when there is no benefit out of it? When a simple tariff is better and is acceptable to the Trade, why give them something, which they cannot digest?

If examples of other countries are any guide, when in all these established countries like Canada, UK and European Union, Japan, etc. there is no HSN for VAT Tariff, there should not be any reason for India to be the path -breaker in the wrong direction.

HSN is originally designed for international trade where the transactions are between big manufacturers and traders. Internal trade is a different kettle of fish. The internal trade in India mostly has invoices carrying large number of items.  In a typical retail shop, the invoice carries hundred descriptions of goods such as powder, snow, soap, fountain pen, ballpoint pen, lipstick, biscuits of different type, some across the counter medicines and so on.    So the conclusion is that in order to improve the VAT system in India, the following three things should be done.  
(i) Leave the VAT tariff as it is without tinkering it ;

(ii) Prune the exemptions drastically in the medium run;

(iii) And finally move towards one rate in the long run.

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