Eminent economist Prabhat Patnaik has contested government's argument that value added tax will be revenue-neutral in the long run, saying the very nature of the new tax system is such that the states are sure to lose revenue.
"If the government is so sure that VAT would not affect the revenue of the state governments, why does it not promise 100 per cent compensation for states in case of revenue loss for all times to come," Patnaik told media persons on Thursday after his talk on 'people's perspective on the upcoming Union Budget'.
'VAT will curb tax evasion, increase revenue'
Finance Minister P Chidambaram had stated that international experience has shown that VAT increases revenue instead of reducing it.
He had promised states they would be fully compensated in case of revenue loss during the first year of implementation of VAT from the next fiscal, after which compensation will be reduced.
By its very nature, VAT cannot be revenue neutral since it is imposed on the value addition and not the entire value of the product, Patnaik said.
The professor at Jawahar Lal University, New Delhi, also described VAT as an infringement on the right of states to impose certain taxes.
He said VAT rates will be determined by the Centre, taking away the freedom of states to impose these taxes.
Asked how does the Centre come into picture as the rates were determined by the Empowered Committee on VAT after consensus among states, Patnaik said the committee was set up by the central government.
Patnaik said if the Empowered Committee is just a body of experts, why has it been "rushing all the time" to persuade states that are opposed to VAT to change their opinion.
"Is it a VAT-implementing authority," he wondered.
Patnaik also said the government should print more currency notes to utilise the idle resources lying in the economy and for pumping more money in health, education and job scheme.
This will not raise inflation as prices increase when there is dearth of products, he said.
Since food stocks are there but people don't have purchasing power, the government should monetise the whole process to put money in the hands of poor people.
Besides, the government should also use the same process to utilise the idle resources in the economy, most of which are with the PSUs.
After idle resources are utlised, the government could think of taxing the rich more aggressively, he suggested.
Asked if that would not increase fiscal deficit, which has to be within limits after the passage of Fiscal Responsibility and Budget Management Act, Patnaik said he does not agree with the idea behind the legislation.
He said cutting fiscal deficit by reducing government expenditure is a ploy by MNCs and international financiers to compel India to give them concessions for investment.