The Hindu Business Line : Ministry asks panel to come up with detailed design for VAT on imports

THE Finance Ministry has asked the Empowered Committee of State Ministers on Value-Added Tax (VAT) to come up with a "detailed design" for levy of VAT on imports.

While the States are making a case for VAT on imports to prevent tax evasion, the domestic industry is keen on such a regime, as it will provide a level playing field.

Official sources said that the VAT Panel has been asked to give a design that would take care of the legal, operational and administrative issues relating to VAT on imports.

Any move to put in place a system of VAT on imports would require Constitutional amendments, sources said. The amendments would be required to either place the VAT on imports out of the divisible pool of taxes (if the Centre were to retain the power to levy and collect VAT on imports) or give powers to the States to levy and collect VAT on imports.

Currently, the Constitution does not allow the States to levy tax on imports and the Centre alone has the powers. It collects customs duty on imports through the powers derived from the Customs Act.

The Constitution also mandates that all Central taxes should go to a divisible pool, unless specified otherwise, and shared with the States as per the tax devolution formula suggested by the Finance Commission.

As the States are keen that the entire proceeds of VAT on imports should go to them, a mechanism has to be found to get over the current requirements of the Constitution through appropriate amendments, Finance Ministry officials said.

Besides the aspect of devolution, the other issue that needs to be resolved was how would the importing State give credit on the VAT paid at the location of import (say a port or an airport).

The current thinking within the VAT panel is that the rate of VAT on imports should be the same as the VAT applicable on the product in the domestic market.