Chidambaram urges states to implement VAT

Finance Minister P Chidambaram today said the Centre would begin consultations with the states on the implementation of a common Goods and Services Tax (GST) after all states shifted to the value added tax (Vat) regime.

"All states must be on board. I will be very happy if they come on board by January. Once VAT is implemented, then we can begin discussions on GST, which will require constitutional amendment and legal changes," he said in response to a question at the Economic Editors' Conference.

He also said that the expert committee on amendments to the Income-Tax Act was expected to submit a draft Bill during the early part of 2006, but did not give any time-frame for the introduction of amendments.

The amendments are expected to provide a roadmap for phasing out exemptions and also simplify the rules governing tax-payers. The finance ministry had earlier said that the amendments would be introduced during the current financial year.

Parthasarthi Shome, advisor to finance minister on tax matters, said the expert committee on introduction of the EET method of taxation was expected to submit its report by the end of the month.

The ministry would decide if the new system of taxation for savings instruments ranging from pension plans to insurance policies and public provident fund would be in place from the next financial year.

He said the committee was expected to come up with a roadmap for savings instruments covered under section 80 C of the Income Tax Act, which provide tax breaks for savings up to Rs 1 lakh in specified instruments.

Chidambaram said he did not subscribe to the idea that savings rate had fallen after withdrawal of tax benefits from savings instruments. He added that the banking cash transaction tax imposed on withdrawals of over Rs 10,000 during a day had helped the income tax department track a large number of transactions. In one case, a person had some 200 bank accounts.

On the proposed rationalisation of duties on petroleum products, the minister said a panel headed by C Rangarajan, chairman of the Prime Minister's Economic Advisory Council, was looking into it and the government would consider the proposals when the panel submits its report.

Regarding a suggestion to replace income tax by a transaction tax, Chidambaram said it was an old suggestion which could not be implemented as there was no way to track all transactions.

"Unless we have a system to track all transactions, we cannot replace income tax with a transaction tax," he said.