The Hindu : VAT will mean more income, but at a heavy price: Isaac

Online edition of India's National Newspaper
Thursday, Feb 27, 2003

Southern States

Southern States - Kerala-Thiruvananthapuram

VAT will mean more income, but at a heavy price: Isaac

By Our Special Correspondent

THIRUVANANTHAPURAM FEB. 26. The CPI(M) Legisalature Party secretary, T. M. Thomas Isaac, has said that the State Government's tax revenue would go up by at least Rs. 750 crores with the switchover to the Value Added Tax (VAT) system, but cautioned that given the way the Government was going about it, the new system would place heavy additional burden on the common man and cause serious setback to the traditional and small industries.

Opening the debate on the Kerala Value Added Sales Tax Bill, 2002 in the Assembly today, the CPI(M) leader reminded the Government that by nature, VAT was a neutral tax and its introduction would mark the end of the proactive taxation policies that successive Governments had used to offer incentives and disincentives to specific sectors of the economy. This would mean that from now on, the Finance Minister would have only fewer tools to intervene in the economy, he said.

Making a studied critique of the Bill in an hour-long presentation, Dr. Isaac said the initial fear that introduction of VAT would result in a drop in tax revenue on account of the State being a consumer State had been proved wrong as VAT would be applicable to the entire product that is brought into the State, the number of items exempted from sales tax had been brought down and key commodities such as sugar, textiles and tobacco would no longer attract additional excise duty. By conservative estimates, the State Government should get additional revenue of Rs. 210 crores on account of this alone.

Out of the 174 items that were exempt from tax, 48 were being made taxable. Simultaneously, as many as 110 items were being moved from the 4 per cent tax slab to higher rates. Besides these, the Government would retain the power to impose up to 40 per cent additional tax on items of its choice. All these measures would result in a rise in income, though not in the coming year, mainly on account of the inept tax collection mechanism that the State now has. The Government's attempt was to use its inefficiency as an excuse to place additional burden on the people, Dr. Isaac said.

The CPI(M) member said he had found that out of the 120 items of daily use by the commo man, 40 per cent would attract higher tax under the new tax regime. Only 18 items would retain their current tax rates. Among 80 non-food items, of which 20 were currently tax exempted, 32 items would attract higher tax rates. This was nothing but regressive taxation and would hurt the ordinary people, he warned.

Dr. Isaac said the new tax system would also prove harmful to farmers as no protective mechanism had been built into it.

Although the original provision seeking to get all farmers in the State as `dealers' of food grains had been scrapped, they would still end up paying higher tax in respect of all sales from the second point onwards. Such additional tax was supposed to be transferred to exporters as refund in the hope of making agricultural commodities more export competitive.

However, this would not have the desired effect as export prices were determined by prices in the international market. "Let us amend this schedule. If the Centre and the Empowered Committee object to it, we will stand together and fight for it,'' he said.

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