India Forges Ahead With Introduction Of VAT

by Lorys Charalambous, Tax-News.com, Cyprus

04 April 2005

After several false starts, the Indian government forged ahead with the introduction of VAT across the country on April 1, in the face of opposition by hundreds of thousands of traders and shopkeepers nationwide.

First proposed a decade ago, the new tax, seen as one of the most fundamental tax reforms since independence was achieved in 1947, is designed to replace the patchwork of different sales taxes levied by individual states, in an effort to make India’s domestic marketplace more efficient whilst bolstering revenues and increasing compliance.

The states will charge the levy at two main rates of 4% and 12.5% on around 550 goods.

However, traders fear that VAT in its current form will actually make the system more complex, drive up prices and have negative consequences for businesses, consumers and the economy at large. Making their feelings known in no uncertain terms, around 1 million traders began a three-day strike on Friday in protest against the tax.

The central government has also faced opposition from state governments. Fearing a decline in tax revenues, the refusal of state governments to accept the new system has resulted in VAT being postponed three times since 2001. However, in a conciliatory gesture, Finance Minister P. Chidambaram pledged that the central government will compensate the states for any loss of revenues over the first three years of its operation.

So far, 21 of India’s 29 state governments have agreed to implement VAT, with 19 of these doing so on April 1.

The north eastern provinces of Mizoram and Meghalaya will begin collecting the tax during the first week of April, while the remaining states ruled by opposition parties have indicated that they are not yet ready to proceed with the tax.

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