Coinciding with the 3-day traders stir against the implementation of value added tax, the Mid-term Appraisal of the 10th plan has pointed to "serious design flaws" in the tax even as Planning Commission Deputy Chairman Montek Singh Ahluwalia maintained that overall it was a more "rational" system.

"There are serious design flaws in the suggested VAT structure. The proposed VAT does not extend to all indirect taxes on goods, as entry tax and octroi will continue," the Plan panel said in the draft Mid-term Appraisal of Tenth Plan.

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"All in all, the combined incidence of central and state VAT is close to 30 per cent. It could be higher if we consider taxes that are going to be retained after VAT is introduced," it said.

However, Ahluwalia said, "VAT is a more rational system. States that don't adopt VAT would, in fact, be imposing a cost on their own producers."

"I can assure that both international and domestic investors setting up new plants, prefer to set them up in states that have VAT than those who don't," he added.

To boost the manufacturing sector, the Plan panel strongly recommended that the effective rate of indirect tax of both Centre and states will have to be brought down to ASEAN level of 10-12 per cent.

"High tax burden will keep prices high and dampen demand, particularly in the case of low-income consumers," it said.