VAT on imports to wait

The decision on the issue of bringing imports under the value-added tax (VAT) net is unlikely to be taken soon, as the move will require a constitutional amendment.

In view of the legalities involved, the finance ministry has asked the empowered committee of state finance ministers to suggest a legal framework.

"Import duties are collected by the Centre under the Customs Act. If imports have to be brought under VAT, then the duty will have to be collected by states. This will require a constitutional amendment in the Act. We have, therefore, asked the states to reach a consensus and suggest a legal framework," an official said.

"The problem becomes more complex because as per finance commission recommendations, the Centre is obliged to give 30.5 per cent of its revenue from taxes to states. However, if imports have to be brought under VAT, states will expect to be given 100 per cent of the tax. This again will require a constitutional amendment," the official said.

Officials pointed out that there would also have to be a clearing mechanism for bringing imports under VAT.

"If an imported item lands at a port in Maharashtra for use by a unit in Delhi, then the VAT will be collected in Maharashtra but will be required to be given by the state to Delhi if the unit located in Delhi has to get input credit," an official said.

"Therefore there will have to be some sort of a clearing mechanism whereby states can obtain data on the imports and claim or pay VAT on imported goods. Most countries in the world implementing VAT do not face this problem as they do not have a federal character like India's," officials said.

The white paper on VAT prepared by the empowered committee had stated that it is essential to bring imports under the VAT purview as the move would not result in any cascading effect but improve tax compliance.

The paper had said: "A proposal for VAT on imports, including the collection mechanism with adequate safeguards for the protection of interest of land-locked states, is being discussed with the Government of India."