India agrees date for VAT launch

Revenue remains a problem despite a big rise in taxpayers

India has finally agreed the launch of its much-delayed Value Added Tax.

VAT at a rate of 12.5% will come in on 1 April next year in what analysts say is the biggest reform of Indian public finances in 50 years.

The tax, agreed after state finance ministers met in Delhi, is designed to make accounting more transparent, cut trade barriers and boost tax revenues.

The system had been postponed many times, mainly because of opposition from the powerful trading lobby.

Key priority

Ashim Dasgupta, who heads a panel overseeing the implementation of VAT, said: "We are very happy to announce that a broad consensus among states was arrived at the meeting to introduce VAT on April 1, 2005."

VAT was to take effect from April last year, but many of India's 29 states said they were not ready.

Many had been reluctant to give up their ability to set taxes on goods and services.

There was also opposition among members of India's former governing Bharatiya Janata Party who feared a backlash from the powerful trading lobby, its main support base.

But the new left-leaning government, headed by the Congress party, has made implementing VAT one of its key priorities.

Analysts say VAT is essential in tackling the problem of tax evasion.

Although the number of taxpayers in India has increased more than fourfold over the past 15 years, the revenue situation in the country remains difficult

The budget deficit is around 10% of gross domestic product and experts had recommended urgent reform to boost tax compliance.

Boosting revenue flows will be essential if the government is to fund ambitious spending plans under its Common Minimum Programme and meet its target of 7-8% annual growth.