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The centre on Tuesday sought to allay fears that VAT will be inflationary and expressed confidence that the new tax system will be introduced by all the states from April 1.
Since VAT is levied on value addition and credit for input tax is given, there is no reason to expect that prices will increase, Parthasarathi Shome, advisor to the finance minister said.
He cited the example of South Africa where prices actually fell after implementation of VAT from 1994.
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On reservations expressed by Uttar Pradesh and Rajasthan over certain aspects of VAT, he said the issue is being discussed between Finance Minister P Chidambaram and chief ministers of the two states.
"At the moment, we are very hopeful (that VAT will be implemented by all states from the start of next fiscal)".
Shome also sought to dispel fears expressed by traders that the VAT would make them liable to harassment at the hands of tax officials, saying only handful of assessees will be picked for scrutiny.
"Penal provisions in the new system would not be harsher than under the existing state sales tax acts," he added.
The advisor to the Finance Minister said a provision will be made in the forthcoming budget to compensate states in case of revenue loss after introduction of VAT.