There is something remarkable about the way Uttar Pradesh fell in line with other states to implement Value Added Tax last week. On April 1, 2005, when most states agreed to switch over to VAT from their sales tax regime, their dominant concern was a possible loss of revenue. The Union finance ministry had to promise several sweeteners including a calibrated compensation formula. Despite the sops, UP stayed away from implementing VAT, citing the possible loss of revenue and opposition from traders as obstacles to the roll-out.

Those concerns were turned upside down as the BSP government in Uttar Pradesh took an in-principle decision to switch to VAT. The state realised it was missing out on an annual 20 per cent rise in tax receipts recorded by other states, plus a gradual loss of business by India’s most populous state to others. State cabinet secretary, Shashank Shekhar Singh, said due to absence of VAT credit, traders and manufacturers in UP were being denied input tax credit. As a result, goods produced in UP were becoming uncompetitive in other states. The state has therefore followed Tamil Nadu to complete the Indian experiment for a nation-wide state-level VAT regime.

After UP, what would the indirect tax landscape look like? Indian and European Union citizens now work under a similar tax format. All goods manufactured and sold in the same state, anywhere in India, will pay a tax only on the value addition. All goods, which attract a central excise duty, too get a VAT refund. The only segment where VAT is not applicable is central sales tax levied for inter-state movement of goods. This is the reason why the current VAT format is called a state-level VAT, and not a national-level VAT.

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