Debating India


Joining the mainstream

Friday 15 December 2006

At long last, Tamil Nadu will switch over to the Value Added Tax (VAT) regime in another two weeks. With the other States in the South having already adopted that system, Tamil Nadu has remained an island of sorts and the only major State in the country, besides Uttar Pradesh, to stay out.

The delay in going for VAT has to do more with political factors than with economic considerations. In the last year of its tenure, and ahead of the 2006 Assembly elections, the All India Anna DMK Government did not want to make any move that could prove to be unpopular. A vocal section of small traders had vehemently opposed the implementation of VAT. Chief Minister Jayalalithaa sought a political consensus on the issue, but that was not forthcoming. It was not just the Dravida Munnetra Kazhagam, the Congress too withheld support to VAT, despite the fact that all the States under its rule had gone in for the change. Within two months of coming to power, the DMK quickly realised the unwisdom of remaining outside VAT. As industry and trade started feeling the heat of competition from across the State’s borders where their counterparts found the VAT regime more friendly and offering the benefits of a lower tariff compared to the sales tax structure existing in Tamil Nadu, they began a quiet campaign for the switchover and worked on the political leadership to bring it around.

While bringing in the legislation to introduce VAT, Tamil Nadu has addressed the basic problems and fears of the small traders. Most important, small traders whose annual turnover is less than Rs.10 lakh are exempted from VAT. This will not only keep the genuine small traders out of the net, but also allay their fears of harassment by the tax officials. Further, the option of compounding the tax has been given to those with an annual turnover of Rs.10 to 50 lakh, and this levy will not exceed half a per cent. Though it has joined VAT belatedly, Tamil Nadu can gain from the experience of the other States and ensure that the system is implemented smoothly and efficiently. There is, of course, the offer of phased compensation by the Centre for any loss the States might incur in their revenues for the first three years. But the VAT proceeds in other States have shown that except where there is not enough manufacturing or value addition, there has been an increase in the revenue. The authorities must ensure that there is no harassment of trade and industry on the ground, while seeking to maximise collections. Perhaps, in Uttar Pradesh too, the switchover to VAT will come about after the Assembly elections, due next year.

See online : The Hindu

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