The Hindu : Business : VAT will not be inflationary, says Shome

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Wednesday, Feb 02, 2005

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VAT will not be inflationary, says Shome

By Our Special Correspondent

NEW DELHI, FEB. 1. While allaying fears about VAT (Value Added Tax) turning out to be inflationary, the Government today expressed confidence that the new tax system will be introduced by all States from April 1. Further the Government would set up VAT monitoring committees in every State and Union Territory to ensure that genuine invoices are raised to completely stop evasion of payment of VAT in any form

As VAT was levied on value addition and credit for input tax was given, there was no reason to expect that prices would increase, Parthasarathi Shome, Advisor to the Finance Minister, told media persons on the sidelines of a seminar on VAT organised by the Associated Chambers of Commerce and Industry.

To dispel fears of any inflationary impact, he cited the case of South Africa where prices actually fell after implementation of VAT from 1994.

About the reservations expressed by Uttar Pradesh and Rajasthan over certain aspects of VAT, Mr. Shome said the Finance Minister, P. Chidambaram, was discussing the matter with the chief ministers of the two States.

"At the moment, we are hopeful (that VAT will be implemented by all States from the start of next fiscal),'' he said.

Mr. Shome said that there was no reason for traders to fear that the VAT would make them liable to harassment at the hands of tax officials and said only handful of assesses would be picked for scrutiny. Further the penal provisions in the new system would not be harsher than under the existing State sales tax acts, he added.

Even as other countries that have introduced VAT do indeed have harsh provisions, including imprisonment, he said, "But that does not suit our culture.'' The two monitoring cells would help in correcting any distortions in the new system that might not have been envisaged, he said adding that the cell would also see whether the credit given to producers is not larger than revenue that the State was receiving from the new tax.

Also a provision, he said, would be made in the forthcoming budget to compensate States in case of revenue loss after introduction of VAT.

He said though the ultimate aim of State-level VAT was to switch over to Goods and Services Tax, no deadline had been set for the purpose. It would not be possible for the Government to abolish Central Sales Tax as demanded by some States including Rajasthan until proper online system of inter-State exchange of information was established.

About exclusion of petrol, diesel and liquor under VAT, the Advisor said worldwide no input tax credit was given on demerit and exhaustible goods.

"But we are not saying that they will never be covered by VAT," he added.

Textile and tobacco were not covered under VAT as smaller States did not want to lose assured income. "It will take some time to bring them under VAT,'' he said.

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