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BANGALORE, Feb. 18

LEADING tax consultants have said that with several States imposing entry tax to protect their revenues, VAT (value-added tax) regime might get distorted.

At a seminar on VAT, Mr Gautam Doshi, partner at RSM & Co, and Mr Rohan Shah and Mr Suhail Nathani, partners with Economic Law Practice, said that the continuance of entry tax in the VAT regime would lead to distortions.

VAT will impact the `entry tax' put in place by the States as there is no move to make octroi VAT-able now.

It is likely to remain unchanged, being a `local' levy, the speakers said in separate presentations.

However, once the fears of revenue loss by the States are allayed, such distortions will be minimised, according to one of the presentations.

VAT, which is expected to come into effect from April 1, will replace sales tax in most States.

Over 123 countries have introduced VAT, with an average rate of 14.4 per cent.

Typically, VAT accounts for 5.1 per cent of the GDP.

In India, State sales taxes accounts for around 1.5 per cent of the GDP.

If all indirect taxes in India were to be converted to VAT, the highest VAT rate would be 44 per cent.

The presentation said that the VAT referred to as the `purest' form of taxation enables States to raise large amounts, has a wide base, does not have cascading effect on the economy and is relatively simple and easy to administer.

It will also make tax evasion unprofitable.

In India, one of the major benefits of VAT is that it introduces a self-policing mechanism that provides internal checks and balances to ensure that the tax is actually paid, as there is an industry interest in ensuring that payments are made at each levy point, to ensure that the chain of credit availing remains unbroken.

Thus, there is policing which ensures that the amount of tax paid at one level is fully credited at the next level.

One of the presentations said that a major problem for free trade between the States would be the issue of cross-border sales.

If VAT were to be introduced on cross-border transactions, the importing State will be obliged to provide the input credit for a tax collected in the exporting State.

Hence, it is necessary that the Central sales tax (CST) which is levied on inter-State sales by the Central Government must be reformed if it is not to become a barrier to inter-State trade in the new VAT regime, the presentation said.

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