'VAT will not fuel inflation'

Empowered committee of state finance ministers on value-added tax has sought to allay fears of traders that the new tax system will lead to increase in prices, stating that the worldwide experience did not support this apprehension.

"The worldwide experience is that there are no price increases due to VAT," empowered committee secretary Ramesh Chandra said during a discussion on the new tax system, organised by CNBC-TV18 channel in New Delhi on Monday evening.

Chandra said campaign by traders that VAT will lead to 20-25 per cent increase in prices was a  'misconception'.

"Even if one assumes that all commodities attracting sales tax of 8 per cent in Northern India are shifted to 12.5 per cent VAT, price hike would not be as steep as 20-25 per cent," Chandra said.

In many states of south India, taxes will come down from 16-18 per cent under the existing sales tax to 12.5 per cent VAT, he said.

White paper on VAT, released by the empowered committee, proposed two tax-slabs of 4 per cent and 12.5 per cent for most items.

Chandra emphasised that all price increases after April 1, 2005 should not be attributed to VAT.

"If on April 1, petroleum prices go up, leading to cascading impact on prices all around, VAT should not be held responsible for it," he explained.

Chandra said, "as per his understanding" the Centre's commitment to fully compensate states for losses during the first year of VAT implementation applies to the states introducing the new tax system from April one, 2005.

"I am not sure if those introducing VAT in between the next fiscal will also be able to get the compensation," he said.

Sanjay Dhariwal of Ken Consulting said states will suffer revenue loss of 15 per cent during the first year of implementing VAT because the tax paid during 2004-05 on the opening stock of 2005-06 will be set off against VAT.

He said this aspect was not considered by the empowered committee while releasing the white paper on VAT.

Chandra claimed that VAT was much simpler than the existing sales tax system and would not lead to 'harassment' as it was entirely based on self-assessment.

Sanjay Bhatia of PHDCCI said the proposed provision under VAT to give credit on tax paid on capital goods at 36 monthly instalments will lead to complexities, particularly regarding the goods sold in the same year.