Prime Minister Manmohan Singh and Finance Minister P. Chidambaram have promised that Budget 2005 will be a budget of tax reforms. Both have also said that India will see a Goods and Services Tax (GST). This is the most important tax reform before us. Others, such as the rationalisation of customs, removal of exemptions, changes in tax rates and so on, can be done at the stroke of a pen. But implementing a country-wide value added tax (VAT) is challenging in many ways.It is administratively difficult, it involves the consensus of states and it involves getting businesses used to the new system. While it is true that the full scale GST which consists of a country-wide tax on goods and services based on the principle of a VAT cannot be achieved this year, the steps needed to move towards it need to be urgently envisaged. Two important steps have already been taken. The first was in Budget 2004, which brought services into the VAT framework and integrated the credit on CENVAT and services taxes. The second is the decision of states to implement the State VAT from April 2005. For India to move towards a country-wide GST involving the Centre and the states, would need the Centre to provide the leadership in setting up a well-functioning Central GST. It must create the administrative capacity to do so. If it does this competently, the Centre will benefit in various ways. Not only will its own revenues go up, it will give the country time to learn the new system and to address the various snarls that may arise, before the new regime goes country wide.In Budget 2005, the finance minister must set up an IT-intensive Central GST, merging all goods and all services, where all transactions will be recorded in one central database. This IT system should be the centrepiece of how VAT credits and refunds take place, and the treatment of VAT on imports and exports should be completely linked up to the system. Such an approach is a small step away from the existing TIN system, which was up and running in eight months, and can be easily initiated in 2005-06. The number of establishments involved is smaller than the number of establishments that have already been plugged into TIN. The system should initially cover registered companies. This entire approach would go a long way to eliminate fraud in Central excise and service taxes. And, when the Centre shows by example to the states that there gains to be made by joining this system, the path towards a country-wide GST will have been cleared.