'VAT to help cash-starved govt'

A day before 21 states switch over to the value-added tax regime, World Bank and International Monetary Fund said the new regime will prevent evasion, push up revenue and help cash-starved government to come out of the debt trap.

"A comprehensive VAT widens tax net, as it makes tax evasion difficult. Going by the experience of other countries, VAT has proved beneficial and leads to revenue buoyancy," World Bank country director Michael Carter told PTI in an interview on the eve of the new tax coming into effect.

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Asked whether implementation of VAT in patches was feasible, he said, "21 states is better than none. It is interesting to see what happens in other states."

Although traders are opposing VAT claiming it had some serious flaws, Carter said "There is no reason not to implement VAT just because there are some flaws in it. It will be a learning process for states. You got to have flaws when you are implementing something for the first time."

IMF also endorsed tax reforms but said more needed to be done to instill fiscal discipline among state governments.

"Looking beyond 2004-04, there was agreement that the bulk of the fiscal adjustment should be achieved through a front-loaded tax reform. The Kelkar report provides a roadmap. The authorities were confident that states could introduce VAT, as planned in April 2005," the IMF said in its recent report.

It, however, cautioned that implementing other tax measures might prove more challenging.

"More needs to be done to entrench fiscal discipline at state level. Some states have succeeded in fiscal adjustment. The CMP's ambitious social agenda may be difficult to reconcile with fiscal adjustment efforts," it added.