Our Bureau

Bangalore, April 12

EVEN as the industry and trade have been debating the tax proposals and the introduction of Value Added Tax (VAT) system in the present form, the Advisor to Union Finance Minister, Mr Parthasarathi Shome, on Tuesday maintained that the Government had to take such measures to rationalise the system to achieve a higher tax to GDP ratio.

Though Central Sales Tax (CST) had no place under the VAT regime, Mr Shome, however, said till all the States came under VAT, CST cannot go.

He said it was agreed amongst the states that if the all the 29 states in India were to agree on VAT then the CST would gradually go. It would first be reduced to 2 per cent next year and would be abolished in 2007.

He said that once the TINEX (Tax Information Exchange System) mechanism was put in place, the anomalies could be overcome.

Participating in an interactive session with the members of the Bangalore Chamber of Commerce and Industry here, Mr Shome disagreed with the BCIC members that VAT could skew certain interstate transactions as all states did not follow similar methodologies. He said Karnataka, which was among the earliest to rationalise its commercial taxes to move towards VAT, should not complain as under the revenue neutral VAT rate of 12.5 per cent, prices of goods should be cheaper to consumers.

He also justified the reduction of the deprecation rate. He said the rationale behind the Government's proposal was to reduce the gap between the book depreciation and tax depreciation as it has been seen that corporates in general have a lower depreciation charge in the books for shareholders distribution in contrast to the tax depreciation claimed in the return. Also, the Government wanted that there had to be a disincentive for capital investment as apposed to employment generation.

He said the "tax depreciation rate should be close to the book".

He also said that reduction in depreciation was linked to the credit for MAT allowed in the proposed Finance Bill.

Reiterating that the budget proposals had been conceived as a means to correct the distortions over the period, which resulted in skewed tax to GDP ratio, Mr Shome, however, assured the Chamber that the Government would try to rectify some anomalies to achieve equitable tax regime.

(This article was published in the Business Line print edition dated April 13, 2005)
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