India releases key VAT-tax plan

Traders are concerned that VAT will put shoppers off and hurt sales

India's government has released details of its long-awaited plan to introduce value added, or sales, tax (VAT).

The VAT system comes into force on 1 April. It aims to widen the tax net and help cover India's spending shortfall.

It also will simplify the present system for manufacturers, traders and consumers, getting rid of a wide variety of add-on tariffs.

Finance Minister P Chidambaram said the tax reforms were the most important since India won its independence.

Currently only a small fraction of India's 1 billion population pay income tax.

Pocket change?

Under the new VAT system, two rates of 4% and 12.5% will be applied.

The lower rate of 4% will be levied on key products such as medicines and drugs, agricultural and industrial goods

The 12.5% rate will be applied to the rest of the goods sold in India.

It will definitely be a big push to improving revenues and capturing revenues Rajeev Malik, JP Morgan

Products including petrol, diesel, aviation turbine fuel, liquor and lottery tickets will be exempted from VAT.

The new tax was initially supposed to take effect in 2003 but was postponed as 29 states claimed they weren't ready for the launch.

Traders have also complained that the increase in tax would lead to price hikes and a drop in demand.

The Federation of Indian Chambers of Commerce said while the move will end multiplicity in taxation, it would have been advisable if other local taxes were also abolished instead of having VAT levied on them.

Traders will meet later this month to discuss what action to take.

Analysts were optimistic about the plan, saying the new system would help increase national revenues by getting more people to pay tax.

"The implementation of VAT shows the government's commitment to fiscal reforms," said Rajeev Malik, an economist at JP Morgan.

"It will definitely be a big push to improving revenues and capturing revenues."