India Releases Long-Awaited VAT Proposals

by Lorys Charalambous, Tax-News.com, Cyprus

18 January 2005

Indian Finance Minster P. Chidambaram on Monday released a much anticipated white paper on value added tax, which sets out details of how the new tax, hailed as the most important tax reform in India since independence, will operate.

The new VAT system is due to come into force on April 1 and is intended to simplify the present patchwork of sales taxes levied at the local level whilst widening the tax net and boosting revenues for the government.

Under the plans set out in the white paper, two rates of 4% and 12.5% will be imposed on around 550 classes of goods.

The lower rate will apply to key items such as medicines, agricultural and industrial goods, while the higher standard rate will be imposed on everything else.

However, certain products, including petrol, diesel, aviation fuel, alcohol and lottery tickets will be exempt from the tax, as will traders with an annual turnover of less than R500,000.

A 1% special rate will also be imposed on gold and silver.

State governments, whose opposition to VAT held up the passage of the new legislation for some time for fear of being left out of pocket, will be fully compensated for any shortfall in revenues, according to Chidambaram.

"Transcending political differences, we have formed a rainbow coalition to implement the most important tax reform undertaken by free India since independence in 1947," declared Chidambaram.

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