VAT's the way: Delhi shows how it works

NEW DELHI: The Budget presented by Delhi finance minister AK Walia sends a clear signal that the value added tax (VAT) regime can improve the state’s finances even after keeping traders with a turnover of up to Rs 10 lakh outside the net.

This is one big message coming from Delhi for other states who may have some apprehensions over the implementation of VAT.

Though the issue of VAT has got needlessly politicised, the government of National Capital Territory has projected a revenue surplus of Rs 2,359 crore in 2005-06 against Rs 1,960 crore in 2004-05.

Fiscal and primary deficits too are projected to be lower in the coming fiscal. All these indicators clearly point to improvement in the finances of the state. What’s more, Delhi has also shown that lower taxes can actually lead to higher revenues.

The Delhi government cut stamp duty on property transfers from 13% to 8% in 2001-02. Collections from stamp duties have doubled since.

Finance minister A K Walia told ET: “I have projected higher revenues mainly on account of better compliance under VAT. I have exempted from any tax items wheat, rice and pulses, which are consumed by the poor. I have also lowered the VAT rate on medicines from 12.5% to 4% to make them more affordable.�

Asked which are the products that he would get higher revenues from, Mr Walia said he expects to garner more revenues from a 4% tax on vehicles costing above Rs 4 lakh and from diesel whose rate has been hiked to 12.5%.

Tax revenues are projected at Rs 7,393 crore in 2005-06 compared to Rs 6,581 crore(RE) in 2004-05, marking a 12% increase.

Delhi’s VAT design is broadly in sync with the decisions taken by the empowered committee on VAT. Small businesses have been protected — traders with a turnover of Rs 10 lakh will be exempt from VAT.

Those with a turnover of Rs 50 lakh can pay 1% on their turnover if they stay out of VAT.

There has been no deviation either from the rate structure approved by the empowered committee.

However, the Delhi government has amended some of the schedules to make products cheaper for the common man. Exceptions, of course, are fuel products like diesel, LPG and kerosene which will become costlier.

VAT is based entirely on self assessment by dealers and the Delhi government should ensure that the spirit of trust is not violated. There will be no separate audit required for VAT, though there could be special audits to protect revenue interests.

Businesses in Delhi will be able to take the benefit of both input tax credit and capital goods credit. The facility will be extended to works contracts as well.

There are sweeteners to make it more trader friendly — they can appeal against rulings departmental rulings.