ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Time to Act

Central Value Added Tax

Excise taxes were, till 1998, the most disappointing feature of the entire tax reform process. But the substantial progress made in the last two years must now be brought to fruition by completing the move to a comprehensive central producer VAT (CENVAT). A simultaneous reform of the central service tax system would lay the ground for its integration into the CENVAT, perhaps a year or two later.

The area of taxation that currently provides the greatest potential for reform and efficiency improvement is domestic indirect taxes. Excise taxes have been, till 1998, the most disappointing feature of the entire tax reform process, with revenues falling far short of expectations. Part of the reason is the slowness in reducing the very high rates on intermediate goods such as polyester, the complexity created by the dispersion of basic rates and the exemptions. The experience of many countries shows that the complications arising from VAT offsets (deductions/credits) can be minimised only by switching over to a single ‘general VAT rate’ and reorienting the administration towards cross checking. The substantial progress made in 1999 and 2000 must be brought to fruition by completing the move to CENVAT in 2001.

A simultaneous reform of the central service tax system would lay the ground for its integration into the CENVAT, perhaps a year or two later. Given the recent agreement by states to introduce VAT by April 2001, the time is also approaching for introducing constitutional changes as a prelude to a national VAT. A national VAT would require integration of state commodity taxes and possible constitutional amendment. Introduction of a national VAT would also require much greater preparation as demonstrated by the introduction of the goods and services tax in Canada.

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