India To Introduce VAT From April 2002

by Mary Swire, Tax-News.com, Hong Kong

08 October 2001

India is preparing to introduce nation-wide VAT in April 2002, to replace an existing patchwork of sales taxes imposed on most goods but only on a small selection of services. A major and troublesome aspect of the changeover is concerned with the revenue base of the States, which currently receive a good part of their income from sales taxes, and fear a loss of income when VAT is introduced - the central government is taking the opportunity to centralise many aspects of tax collection.

Plans for the introduction of VAT have already been put back a year due to the absence of a consensus between the states and the centre on changes that have to be made to the sales tax structure and the states' lack of preparedness for introducing the VAT regime. The current ramshackle sales tax structure gives rise to countless disputes and misunderstandings, apart from the fact that rates vary from state to state - something that has to be changed before a centralised VAT becomes a possibility. Last week the central government announced it would amend the Central Sales Tax (CST) Act in the winter session of Parliament to facilitate imposition of the VAT regime in the states.

The government accepts that it will need to compensate any states that lose out under the new regime, but says that pending final agreement on the level of VAT and collection procedures it is not yet possible to quantify possible losses. Finance ministry officials said that a decision on the compensation package to mitigate revenue losses, if any, would be taken on the basis of the recommendation of the panel currently studying the issue. The panel, which was supposed to report by the end of September, is now promising its report by the end of October.

Officials said that though the government was of the view that the VAT regime would increase tax collection of the states and the apprehensions of revenue losses were unfounded, it was not averse to transferring some parts of VAT collection dealing with local services to the states, which would enhance their revenue collection. This decision was awaiting the report of a further panel, also due by the end of October.

Last month details emerged of a draft Value Added Sales Tax Act 2001 which envisages severe penalties for tax evaders, including a maximum three-year gaol term for a non-registered dealer found guilty of selling and buying goods as a registered one, or for the furnishing a false return exceeding Rs 10,000.

According to the draft, every dealer whose turnover during the year ended on March 31, 2002 or the year commencing on April 1, 2002, exceeds the relevant specified limit will be required to register under the Act. The specified limit will be Rs 50,000 for a dealer who is an importer and the value of taxable goods sold or purchased by him during the year is not less than Rs 10,000.

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