VATa step to unite economic India

20 January 2005

Key details of long-awaited value added tax (VAT), a key step towards tax reforms, which will mark the beginning of India as a large common market.

Finance minister P Chidambaram has finally taken a giant leap towards simplifying taxes as he announced the white paper on value added tax (VAT) this week. VAT puts an end to the maze of multiple taxation and brings down the amount of taxes for manufacturers and traders and thus lowers the prices of goods for the consumer.

As a result, the overall tax burden will be rationalised and prices, in general, are expected to fall, the tax base will widen inducing better compliance and, thus, will net more revenues. VAT will make the tax structure simpler and more transparent, in short, an all round win-win proposal.

The economy will work on a federal structure. Till now each state had a virtual sovereign status in matters of its taxes — a throwback to the erstwhile princely states, which could impose what taxes they pleased — which elected state governments retained as a viable revenue model.

With VAT's uniform structure it should be possible to cut cumbersome paper work by computerising records, a step that would usher in transparency in tax accounting.

Expectedly, traders are not particularly delighted about it, though they claim it would impose more paper work and administrative burdens. The Federation of Indian Chambers of Commerce and Industry said that while the move will end multiplicity in taxation, it would have been advisable to abolish other local taxes instead of levying VAT on them. Traders will meet later this month to discuss what action to take.