|Traders protest against the implementation of a value added tax (VAT)(File photo)|
Institution of the VAT is the Indian government's most ambitious attempt at reform. It is designed to simplify the tax system by getting rid of multiple layers of levies. It is also designed to end tax evasion, boost the revenues of cash-strapped state governments and lower inter-state trade barriers.
But traders have slammed the VAT. They say it has been poorly prepared and could increase their financial burden, because other taxes will continue to be levied for a year.
Amrit Lal Bansal of the Confederation of Indian Traders says the new tax is too complex. He says it will increase paperwork and expose traders to harassment from government inspectors.
Eight state governments, some of them ruled by the opposition Bharatiya Janata Party, have decided not to implement VAT. The BJP says it will wait until the tax is simultaneously implemented all across the country, to create a level playing field.
The government says the worries of traders and dissenting state governments are misplaced. Ashim Dasgupta, a senior official from West Bengal state, heads the VAT implementation committee.
"In general the tax burden will come down," he said. "For some commodities it may increase, but for most of the commodities it will come down."
Under the VAT system, 550 goods will be taxed at basic rates of either four percent or 12.5 percent. The lower rate will apply to products such as medicines and some food items.
During the past decade, the reform has been put on hold at least five times, due to loud protests from traders and state governments reluctant to give up their power to levy taxes.
But this time the government has refused to back down. Business experts have welcomed the new tax, saying it is the type of reform that is necessary to cope with a growing and modernizing economy.