Hopes that VAT would be introduced on April 1, 2003 have been belied. Meanwhile the strikes and bandhs already observed and planned to be observed by the business community in many states should be a matter of great concern for policy framers.

Meanwhile, the government of the National Capital Territory of Delhi has voiced its concern over the 'high rate of tax', arguing that the 'general rate' of VAT which applies to all commodities is 'very high'. This raises pertinent questions about the rate structure of the proposed VAT; about its design and the half-hearted steps taken to implement it.

When VAT is introduced, instead of having four rates of 0%, 4%, 8% and 12% (with 8% being the 'general rate' applicable to most commodities), the new rates would be 0%, 4% and 12.5%, with the 12.5% being the 'general rate'.

Prior to November 1999, rates under sales tax were very low. Delhi had the lowest rates among its neighbouring states. In many of the eastern states the tax was not even in existence.

Under these circumstances, the consumers would certainly be adversely affected under the VAT regime, if 12.5% is prescribed as the floor rate.

It is, therefore, indeed important that instead of jacking up the general rate to a very high level, we should fix it at 8%, leaving the choice with the states to have a higher rate, if they so desire.

Such a structure of VAT would provide autonomy to states in fixing tax rates. Under the present circumstances, the states are not left with any alternative. Consequently, dependence of all the states on the Centre would increase considerably.

If the floor rate is fixed at 8%, there would be no public resistance. Hence there would be no problem for states in switching over to VAT, as this rate would not increase the tax burden on the consumers.

However, the states that already have a high rate of tax under the sales tax regime, primarily due to the levy of additional sales tax, turnover tax as well as surcharge, could have a tax rate higher than 8%, as VAT would replace all such taxes.

Such variations in rates among federating units are not uncommon. The member states in the European Union have different rates. Since the tax is on consumption within the state, there is no diversion of trade.

Also, in the United States, where the last-point sales tax exists, and in Canada where the provinces have both sales tax and VAT, the rates vary across states / provinces.

Keeping this in mind, it is recommended that under the VAT regime, the floor rate should be prescribed at the level of 8%, with freedom to states to raise additional resources based on their tax efforts and taxable capacity.

The issue of floor rates must be reconsidered also in the light of the existing CST, until it is reduced to zero. When seen in the context of coexisting CST, the floor rate is much higher in the consuming states as compared to the producing states.

This has not only affected the consumers of the consuming states but has also caused a diversion of trade from the poor states to the rich states.

The idea of a floor rate was to stop the rate war but this has eventually worked in the favour of developed and industrialised states.

The poor and consuming states are, in fact, paying a higher floor rate. A motor car, for example, is taxed at 12% in West Bengal but at 16% in Mizoram (12% Mizoram sales tax and 4% CST)! This has caused diversion of trade from the poor and consuming states to the rich states.

This distortion can be corrected by allowing importing states the autonomy of having floor rates as per their taxable capacity and this could be floor rate minus CST paid in other states.

In addition to the issue of rates, the business community has been angry over the way VAT is being implemented. They have rightly pointed out that CST and VAT do not go hand in hand.

CST must be reduced to zero to make India a unified market. In this context, while it has been decided that all the commodities sent out of state would be given input credit for the state tax that has gone into it; and the existing CST would be reduced to 2% as of April 1, 2003, it does not remove the tax barriers in the inter-state trade. The treatment meted out to consignment transfers would be a serious problem for industries having an all-India character.

Industries that have set up different units of their production activity in different states would face serious problems of competition with other units and specially from imports.

Also, this would, in fact, be disastrous for industries importing raw material from outside the state and consigning their output to other states.

While introducing VAT, it is very important that the CST is reduced to zero percent and all interstate transactions including consignments are treated at par.

Opposition to VAT stems further from the modus operandi of its implementation. As of today, the public is not even aware of the tax rates for all commodities.

It is extremely important that not only the tax laws but the procedures are also made public both for comprehension and for examining the economic effects of the proposed system.

The treatment of small dealers under the new regime is resulting in traders' strikes. The general approach is to provide them with a simple scheme of turnover tax based on certain criteria.

Most administrators have, however, misunderstood this phenomenon. They treat this as a means of keeping these dealers out of the VAT regime, which is absolutely an incorrect approach.

These dealers should be allowed to issue invoices to the consumers showing the usual VAT rate to enable their purchasers to claim set-off in their further transactions.

Finally, it is important that the perception of VAT both for the tax payers and administration is changed wherein interaction of the dealer with the department is reduced to a bare minimum and taxpayer is aware of his charter of rights.