India says 21 of 29 states to launch new tax

NEW DELHI: India said on Thursday that 21 of its 29 states would introduce a value-added tax (VAT) on April 1 as planned, ruling out any delay even though some states are refusing to implement it.

The launch of VAT, India’s most significant tax reform for years, had been in doubt after the main opposition Bharatiya Janata Party said last weekend that five states it rules would not implement the tax on the planned start date.

“Most state finance ministers are strongly committed to launch VAT from April 1. At least 21 states are ready to launch VAT I urge the other states not to miss the historic opportunity,” finance minister Palaniappan Chidambaram told reporters after meeting a panel of state finance ministers.

VAT has been delayed five times in the past 10 years and the congress party-led government is under pressure to get it rolling. It forms the center-piece of the cash-strapped government’s tax reforms and failure to implement it would be a blow to the coalition’s reformist credentials.

The BJP tried to introduce the tax when in power in 2003 and part of its resistance now stems from strained relations with congress at the state level. It argues as well that the tax should start only when all 29 states are ready. Some, including the most populous, Uttar Pradesh, have not passed the necessary legislation.

Ashim Dasgupta, chairman of the VAT panel, told a news conference he had met BJP leaders and urged them to reconsider.

“The idea of VAT was introduced during the (BJP) government. We were together then, we want to be together now,” he said.

Industry groups back the tax, saying it would transform fragmented state markets into a common Indian market.

“Since more than 130 countries have already adopted VAT, India will be at a competitive disadvantage if we do not reform our existing tax system,” said Mahendra K Sanghi, president of the Associated Chambers of Commerce and Industry.

Traders to strike: But VAT is deeply unpopular with India’s powerful trading lobby, whose members fear they will have to pay more tax as a result. They have called a strike for April 1 in protest.

To address one of their concerns, Dasgupta said the threshold for traders would be doubled to gross annual turnover of Rs 1 million ($22,830) from the Rs 500,000 level that had been planned.

“Doors for discussion are open,” he said. “VAT will be friendly to industry, trade and consumers and the overall tax burden on commodities will be reduced.”

The tax levied on the value manufacturers and retailers add to goods at each sale point in the chain, is to replace a web of sales taxes across the states that has led to duplicate taxation.

It will cover 550 goods have two basic rates 4 percent and 12.5 percent and a special rate of 1.0 percent for gold and silver ornaments. It is meant to create a uniform system, curb rampant tax evasion and increase revenue for the state governments.

News the government was pushing ahead had no impact on the rupee, stocks or the government bond market. But analysts were relieved the government was sticking to the launch date, even though they were disappointed not all states would be participating from the start.

“It is good that 21 states have joined in. But to realise the full benefits of VAT, we need it to be uniform across the country, which hopefully will happen as time progresses and as other states realise the benefits of VAT,” said Indranil Pan, chief economist at Kotak Mahindra Bank in Bombay. —Reuters

Home | Business