VAT implementation to be delayed

The state government will not implement the Value Added Tax (VAT) with effect from April 1, 2005. This is because it feels that implementing VAT will make little sense in a scenario where several states are either not prepared or are undecided to implement VAT.

State government officials said on Thursday that there was a broad consensus at a state Cabinet meeting on Wednesday that it would make no sense to implement VAT in a scenario where other states were not willing to do so.

"There was a feeling that VAT should not be implemented in Gujarat from April 1, if other states do not implement it. In all probability, VAT will not come into force in the state from April 1," a senior minister said.

Chinubhai Shah, president of the Gujarat Chamber of Commerce and Industry, said: "The industry is functioning anyway without VAT. But what is not good for the industry is that there ought to be a clear cut statement whether VAT will be implemented or not from April 1. A similar situation was encountered at around this time last year, when VAT was to be implemented, but eventually it was not."

Shah said that manufacturers and stockists actually held back stocks last year, anticipating that the VAT regime will come into force.

"Such a volatile situation is not good for the industry. The government must make it clear whether VAT will be introduced or not," said the GCCI president, adding that earlier this issue is clarified, the better.

Industry watchers say that the VAT system, if enforced properly, can form part of the fiscal consolidation strategy for the country. Further any globally accepted tax administrative system, will only help India integrate better in the World Trade Organisation regime.

India is among the last countries that are planning to introduced VAT. Value added system has been adopted so far by over 120 countries worldwide.

The decision to introduce VAT was publicly discussed first at a conference of state chief ministers and finance ministers in November, 1999. At that time, the deadline of April 2002 was agreed upon to implement VAT.

The Jari industry of Surat has already expressed its apprehensions about implementing VAT. The state government had issued a white paper on VAT last week, containing a list of 56 items that would be exempted from VAT. However, the traditional jari is classified as a handicraft, and is even exempted from sales tax, but it did not figure in the list.

The diamond industry too has opposed the implementation of VAT, stating that 99 per cent of all diamonds polished are exported and hence do not attract the tax. It contends that for the remaining one per cent, there is no need to introduce VAT because it will not result in much revenue, but will force traders to file several documents.

Dipankar Roy, director, Gujarat State Council of the Federation of Indian Chambers of Commerce and Industry (FICCI) said that while there is the provision of revenue neutrality in VAT, as the central government will monitor the tax collection, states which have already put in a system for implementing VAT will have no other option than wait for it to be implemented across the country.

"There needs to be a consensus among states to implement VAT. The tax is structured in such a way that it has to be implemented across the country, so that the central government can mobilise funds where there is a deficient collection," he said.