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Rediff News  All News  » Business » VAT regime from Apr 1 despite BJP shock

VAT regime from Apr 1 despite BJP shock

March 21, 2005 08:42 IST

The value-added tax will be implemented on April 1 despite the decision by the Bharatiya Janata Party-ruled states to stay away from the new taxation regime.

When contacted, Finance Minister P Chidambaram declined to comment on the issue. However, Ramesh Chandra, member-secretary of the empowered committee of state finance ministers on VAT said: "There is no change in the VAT deadline. The new regime will be implemented with whichever states are on board." Asked if an emergency meeting of the committee would be called, Chandra said: "We will take a decision on this tomorrow".

Finance Minister P Chidambaram had earlier last week stated in Parliament that the sales tax system would continue in those states which were unable to implement VAT from April 1.

A Delhi government official pointed out that with several states opting out of VAT, the empowered committee would have to take a fresh look at the floor rates to avoid discrepancy in tax rates on items in VAT-implementing states and non-VAT states.

"At present, the average floor rates in most states are 4 per cent and eight per cent, while under VAT, the floor rates envisaged are four and 12.5 per cent. Hence, items in non-VAT states will continue at 8 per cent while under VAT, they will increase to 12.5 per cent. The committee might have to have a re-look at the floor rates," an official said.

Rajan D Gupta, head of indirect tax practice at legal firm Khaitan & Co pointed out that larger firms would now find it difficult to finalise their pricing policies and maintain records as they would have to comply with a one-point sales tax in non-VAT states and with VAT in other states.

Gupta said there would also be discrepancies in sales tax exemption schemes. The empowered committee had taken the view that under VAT, all the exemption schemes would be converted to deferment schemes under which manufacturing units pay the tax but keep the tax amount as an interest-free loan from the government for 7-9 years. The tax amount is paid to the government after 7-9 years.

"With only some states implementing VAT, the non-VAT states will continue to implement exemption schemes with the result that the cost of goods in such states would be cheaper than in the VAT-implementing states," Gupta said.

Also, since the input tax credit will be available only in VAT-implementing states, there would be differences in the cost of production vis-à-vis the non-VAT states as the output cost in such states would be higher.

A case in point is Delhi, which has neighbouring states of Uttar Pradesh and Rajasthan deciding not to comply with VAT. The Delhi government is expected to stick to the April 1 deadline.

"We will go by the decision of the empowered committee," said a Delhi government official. The Delhi government, on March 18, decided to implement VAT despite the neighbouring states showing their reluctance to join the league.

Meanwhile, the Confederation of All India Traders, which played a prominent role in convincing the BJP-ruled states to defer the implementation of VAT, today said it would meet other political parties as well to garner support against the new tax regime.

CAIT secretary general Praveen Khandelwal said the lukewarm and "non-serious" approach of the Centre and the state government towards VAT was clear from the fact that so far, no State had made its VAT rules public, nor was the list of 550 items identified by the empowered committee on tax rates available.

Khandelwal said in order to step up their agitation in Delhi, traders would take out a car rally on March 23 and a "VAT funeral procession" on March 25.

VAT boils over

  • The discrepancy: The average floor rates in most states are 4% and 8%, while under VAT the floor rates envisaged are 4% and 12.5%
  • The problems: Larger firms will find it difficult to finalise their pricing policies and will have to grapple with discrepancies in sales tax exemption schemes
  • Dissenting voices: Rajasthan, MP, Chhattisgarh, Gujarat. UP and Tamil Nadu are clear on not implementing VAT. Jharkhand has not come up with a law
BS Economy Bureau in New Delhi