Govt may raise turnover limit for VAT to Rs 10 lakh

NEW DELHI: The government is actively considering raising the minimum turnover limit for the purpose of levying value added tax (VAT) from the present Rs 4 lakh to Rs 10 lakh. Businesses with a turnover of less than Rs 10 lakh may now be exempt from VAT.

If implemented, the new threshold limit will remove various small businesses from the VAT net. It will also neutralise the residual political opposition to VAT from states like Uttar Pradesh and Tamil Nadu.

AK Walia, Delhi's finance minister, told ET that the chairman of the Empowered Committee on VAT is seriously considering the new turnover threshold of Rs 10 lakh so that VAT can be implemented smoothly in lieu of sales tax across all states. The Centre has been anxious over whether it will be able to implement VAT from April 1.

For the new tax system to become meaningful, it is important that UP, one of the biggest states, comes on board. Sources said the new threshold limit may whittle down resistance from traders in UP. The Empowered Committee of State Finance Ministers has been effecting changes in the VAT design to make it more acceptable to traders and the political class as well.

The panel initially decided to exempt small dealers with a turnover of up to Rs 5 lakh from VAT.

Those with a gross annual turnover of up to Rs 25 lakh were to be given the option of paying tax on a small percentage of the gross annual turnover, if they chose to stay out of VAT.

Such a composition scheme is available under the sales tax regime as well, though there have been very few takers. The threshold under the composition scheme was raised to Rs 40 lakh and subsequently to Rs 50 lakh.

Earlier, UP had sought to raise this limit to Rs 20 lakh - which meant that dealers with a gross turnover of up to Rs 20 lakh would be fully exempt from VAT. The white paper on VAT clearly says that states will have the flexibility to fix the threshold limit within Rs 5 lakh.

However, some states like Kerala have already notified a higher threshold turnover of Rs 10 lakh. The Centre is now making efforts to ensure that all states agree to a single threshold limit to avail of VAT exemption.

To make VAT effective from April 1, the Cabinet has already approved the compensation package, which comes with certain riders. The most significant condition is that compensation will be provided only to those states that adhere to the decisions of the Empowered Committee.

While the Committee has made the composition scheme more attractive to give substantial relief to traders, it has not yet taken a decision on raising the threshold exemption. The Centre may have to seek Cabinet approval again in case a decision is taken by the Committee to raise the threshold exemption limit.

Some states are also demanding a compensation on revenue losses due to phase-out of the central sales tax (CST). The Empowered Committee will suggest a roadmap for CST phase-out linked to compensation. However, in the first year of VAT implementation, CST will remain at 4%.

Source: The Economic Times