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VAT reduction in Delhi budget: can populist move increase revenues?

Deputy Chief Minister Manish Sisodia, who also holds the finance portfolio, said in his budget speech that his Rs 46, 600 crore budget was financed primarily from Delhi's own tax revenue of Rs 36, 525 crore.

Written by Apurva | New Delhi |
Updated: March 29, 2016 4:45:48 pm
New Delhi: Delhi Chief Minister Arvind Kejriwal with Dy CM and Finance Minister Manish Sisodia addressing a press conference after presentation of the budget in the Assembly, in New Delhi on Monday. PTI Photo New Delhi: Delhi Chief Minister Arvind Kejriwal with Dy CM and Finance Minister Manish Sisodia addressing a press conference after presentation of the budget in the Assembly, in New Delhi on Monday. PTI Photo

The Aam Aadmi Party (AAP)’s second budget in Delhi that was presented on Tuesday while continuing to concentrate on core sectors like education, health and transport also seeks to make life more affordable for citizens by slashing VAT rates on at least eight items.

The move to slash VAT rates is one of dual intent – stay the course on “people friendly” policies, widen the Delhi tax base and hope to increase revenue. With no new taxes imposed and just one raised, the tax proposals could reduce Delhi’s tax revenues which in the 2015-16 financial year contributed to more than 65 per cent of its total revenue.

Deputy Chief Minister Manish Sisodia, who also holds the finance portfolio, said in his budget speech that his Rs 46, 600 crore budget was financed primarily from Delhi’s own tax revenue of Rs 36, 525 crore.

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AAP’s detractors have been quick to slam Sisodia’s tax proposals as “populist”. The opposition BJP and Congress in Delhi claimed that by decreasing VAT rates without prior research could be disastrous for a state that is solely dependent on its own tax revenues. “First there are subsidies for power and water and now slashing VAT rates. How can the state promise development without money?” asked one BJP leader.

Sisodia and the AAP claimed otherwise. Sources in the government maintain that by slashing VAT rates on certain items – sweets, namkeen, watches, readymade garments, shoes, battery-operated vehicles and school bags – VAT collections would increase. “Here we are trying to stimulate and target the tertiary market in Delhi which forms the bulk of the VAT tax base. Delhi has little industry or manufacturing from which to gain revenue,” explained one government official.

Sources in the government also said that the move was based on something they had tried in the 2015 budget when VAT rates on timber and wood were slashed from 12.5 per cent to 5 per cent. “Eventually it did not affect our collections negatively at all and in fact had a positive impact. We found that while the VAT collected per transaction was obviously lower, the number of transactions increased. This also negates the impulse to under report transactions,” argued a government official.

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