At the outset, I congratulate FAPCCI for organizing this Symposium. I am also thankful to FAPCCI for allowing me to speak to you for few minutes.

We all know that even in 400 B.C., Kautilya in his “Artha Sastra” specified the points and rates of tax leviable on various commodities. There were import and export duties in the name of “sulka”, octroi and gate tolls were levied in the name of “dwarabahirikadeya”, road cess in the name of “vartani”, royalty in the name of “prakriya” etc. Tax and taxation are generally regarded as unpleasant subjects.

While I was undergoing advanced training in Sales Taxation in May, 1984 in the National Institute of Public Finance and Policy, New Delhi, I could for the first time hear about VAT from Dr. Raja Chellaiah, the then Director of the Institute. In the year 1998, Sri Satya Poddar conducted a five day work shop on VAT in Hyderabad, which was jointly organized by World Bank and Government of Andhra Pradesh. There were about 50 participants from the Commercial Taxes Department, Trade and Tax Professionals. I could then know that ‘zero’ is also a rate of tax and that ‘zero rate’ does not mean exemption. All the participants were asked to speak for two minutes each on the subject on the last day. I spoke on ‘impediments in the implementation of VAT’ for two minutes and Sri Satya Poddar adjudged it as the best speech in the work shop and presented me a pen with an advice to write and speak more on VAT in future. We are all thankful to Sri Satya Poddar for imparting excellent training to us on the proposed VAT. We are grateful to Sri Poddar and Sri Laxmi Kumaran and Sri Aravind Modi for sharing their knowledge with us today.

Coming to the subject proper, that is, issues for discussion, the first question that is being asked by all the concerned is why the Central Government and the State Governments have not so far reviewed the functioning of VAT system of taxation, after having half-a-decade experience. The responsibility of a democratic government does not end by just enacting a taxation statute. Trade and industry experienced innumerable problems in the implementation of the new system. One should agree that all is not well either in drafting the VAT statutes or in its implementation. Review of present VAT system and consequential recommendations by a Committee of experts would result in providing the best GST system of taxation. I would therefore request the speakers of today to deliberate on this issue, particularly whether VAT system has any deficiencies, pitfalls, hardship etc., and recommend for such review so that they do not recur in the GST system.

The next issue is the promise of creating common Indian market at the time of introducing VAT. Yes, it is yet to be created. Adoption of different rates of VAT by the States, despite commitment made to the Empowered Committee of State Finance Ministers, prescription of import permits/advance way bills and fighting to retain the power to levy non-vatable Entry Tax are some of the impediments in creating such market. Many High Courts struck down the Entry Tax Acts. States carried the matter to the Apex Court, which is now pending before the larger bench. In the recent National Tax Conference held in Cuttack on the 9th April, one of the Honourable Judges observed that if the Entry Tax Acts are struck down, how can anybody expect funds to the local bodies. If it is the intention of the States to continue with non-vatable Entry Tax, how can we create common Indian market? The issue is whether such market would be created at all.

One of the aims in introducing VAT is to remove the cascading effect to achieve neutrality. But in practice, cascading effect continues. Experience tells us that no dealer wants to pass on the benefit of tax credit to his customers. Prices continue to include tax on tax. When the rate of tax on Medicines in Andhra Pradesh has been reduced from 10% to 4% with Input Tax Credit consequent on implementation of VAT, the prices never came down. Can we say therefore that cascading effect has been removed consequent on introduction of VAT in the country?

Though there has been promise that in VAT regime, scope for litigation will be minimized, still exercise of discretionary power by the authorities has been resulting in severe hardship. The best example is levy of tax on the transaction of transfer of right to use the goods. Both the VAT and Service Tax authorities have been levying tax on the same transaction taking contrary stands on the issue of transfer of effective control and possession. Why should Governments allow such things to happen for over two years. Tax payer is required to pay about 25% tax under the two statutes. No authority takes into consideration the decision of the Honourable Supreme Court in the case of Imagic Creative Pvt. Ltd vs. CCT (2008) 12 VST 371, wherein it has been held that service tax and VAT (sales tax) are mutually exclusive. Trade and industry is afraid that such problems will continue even in GST and nobody in Government would be ready to hear these problems.

While introducing VAT it is said that there would be no classification disputes. It is said---the deeper you swim, the larger will be in sight, such is the vast sea of judicial interpretation of various entries and commodities which are the blood cells of Sales Tax law. “There is no presumption in this country that every person knows the law; it would be contrary to common sense and reason if it were so:--the Honourable Supreme Court so observed in the case of Motilal Padampat Sugar Mills Company Limited vs. State of UP (118 ITR 362).

Every person has his own way of interpreting the entries in the schedules. In most of the cases, the tax collector refuses to accept the rate of tax and commodity classification adopted by the tax payer. About 50% of the VAT Advance Rulings in each State dealt with commodity classification only. Dr. Poddar taught us that one rate of tax is ideal, two tolerable and three disastrous. In the present scenario, even two rates of tax have become disastrous, as the authorities attempt to prefer the higher of the two. In GST also, there is no guarantee that there will be no disputes on commodity classification. In fact the first discussion paper confirms that the present confusion will continue.

VAT is a multipoint system of taxation with the benefit of Input Tax Credit. However in the case of State of AP vs. Larsen and Toubro Limited and others (17 VST 1), the Honourable Supreme Court held:-

“Thus, in our view, in such a case the work executed by a sub-contractor, results in a single transaction and not multiple transactions.”

Hence transactions of works contracts do not fit into the VAT system. In a situation where a second or third sub contractor has executed the work and paid the tax, the main contractor is not able to issue tax invoice to the contractee and consequently, the contractee has been facing difficulties in availing Input Tax Credit. Governments have failed to provide any solution. The issue is therefore whether we can really accommodate these transactions in VAT or GST system.

Procedural provisions made it difficult for compliance at low cost. I am told that in Karnataka, for example a common assessment order is passed for 30 months. However, the dealer has to file 30 separate appeals. Unfortunately it is a case of works contract and the agreement along with the schedules run into 300 pages. For each appeal 4 sets are to be made i.e. 1200 pages and for 30 appeals the count of X erox copy pages is 36000. While the assessing authority just releases a four page order, the dealer has to spend about Rs.40,000 on getting X erox copies only. Bureaucracy does not want to change the provisions. Dealers are afraid that such procedural provisions would continue even in GST, as there is no Tax Ombudsman in any State.

Each State has its own way of making charging Sections and procedural provisions. Procedural law relating to registration, filing of returns, making assessments, transporting goods etc., differ from State to State. At least, the States could have agreed for uniform procedures, as there is no revenue involvement. Lack of consensus in such matters would make the exercise unsuccessful. I am afraid that it would continue even under the proposed GST mode.

Food grains, vegetable oils and pulses are not at all taxed by some States and some States have been levying 4% tax . These are essential goods for March of the Profesional – Speech delivered by P. V. Subba Rao ... all human beings everywhere and are not essential goods only in some States. While under General Sales Tax, these goods were taxed @ 4% at the first sale point, they are taxed at the same rate of 4% on MRP in the VAT system. There is no effect of Input Tax Credit on these goods for various reasons. Quantum of tax levied on these goods is more in the VAT system and would continue to be so even under the proposed GST system. Why not all the States exempt the essential commodities from the levy of tax.

Governments have their own revenue problems and hence in a number of ways, claim of ITC has been denied/restricted/limited. VAT system itself has been introduced for providing ITC. If such claim is minimized to the maximum extent, then there is no meaning to have VAT system at all. I may add that about 50% of revenue in any State is derived from Petroleum Products and liquor, which are outside VAT system of taxation. Dealers opting for composition and dealers below the threshold limit are not eligible for credit.

There is ineligible list of goods, in addition to restrictions and limitations on the claim of ITC. May be ITC effect is hardly on 30 to 40% of revenue in a State. At least after 5 years of introduction of VAT, Governments can consider relaxing such restrictions and allow full credit in the proposed GST. The question is whether to have full form of GST or not.

In the foreword to the discussion paper dated 10-11-2009 written by the Chairman, Empowered Committee of State Finance Ministers, it is said “Interaction with industry, trade, agriculture and common people and campaign will immediately start at the national level and at the State levels. As a part of this interaction, we look forward to receiving their views.” However even after six months, neither such immediate, I repeat immediate interaction nor campaign has commenced in the country. Our experience tells that whatever the Governments want to do, they will do it, by making an observation that all the stakeholders have been consulted. Rarely public opinion has been honoured in taxation issues because revenue realization occupies uppermost place.

Tax payers have been facing multiple audits, high pitched assessments, unending litigation, delay in refunds, etc. Tax payers have been questioning the absence of accountability on the part of authorities for their actions. Demand for making accountability, as part of the taxation statute has been picking up, particularly where high pitched assessments are made.

I request the speakers to address these issues.

There are many more issues, which in my view may not be solved in the proposed GST because according to Sri Satya Poddar, GST has become an orphan. It has two mothers and two fathers and nobody knows who has the charge. Sri Poddar also described the first discussion paper on GST as ‘a patchwork of political compromises, which is neither good economics nor good politics’.

Old taxes never die, soon they take birth with a new name. General Sales Tax becomes VAT and VAT becomes GST. It is said that death and taxes are certain. But with a bad taxation law, early death is more certain. Let us pray God that GST would really benefit Government, dealers, consumers and of course tax professionals.

Sarve Janaaha Sukhino Bhavantu.