Indian States Finally Agree To Implement VAT

by Lorys Charamlambous, Tax-News.com, Cyprus

04 November 2004

India’s Finance Minister P. Chidambaram announced this week that the majority of state governments have finally agreed to implement a nationwide Value Added Tax from next year, a move considered by some observers as the largest shake-up of the Indian taxation system for decades.

After a meeting with 29 state finance ministers, Chidambaram confirmed that 26 had agreed to go ahead with the VAT plan. The three remaining states will reportedly receive “technical assistance” from the central government to put the tax in place.

The new 12.5% tax is expected to be in place by April 2005, and will replace the current patchwork system of general sales taxes which are levied at different rates in individual states. It is hoped that the new tax will boost overall tax revenues, reduce red tape and reduce opportunities for corruption.

However, until the recent agreement, most state governments saw the national VAT scheme rather differently and consistently defied the central government’s plans, fearing loss of control over their ability to collect taxes, and reduced revenue streams.

Consequently, the timetable for its introduction has been postponed five times since 2001.

Should VAT be introduced next year as planned, some economists consider the change will be the most dramatic reform of taxation in India since the country became independent in 1947.

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