By just changing the name of the "entry tax" to "advance tax" to be imposed on imported goods, the Punjab government on Thursday tried to plug an alarming leakage in tax collection.

Top government sources say the "entry tax" due to a legal lacuna was being exploited to the hilt by the traders, which led to a sharp decline in collection of the tax in the past two years.

In the financial year 2010-11, Punjab had generated Rs. 2,529 crore under the entry tax. But it kept shrinking after traders challenged it in the court and during this fiscal the cash-strapped SAD-BJP government expected to collect Rs. 624 crore.

The Punjab cabinet, which met here on Friday, gave nod to convert entry tax into advance tax. This 6.05% tax will be imposed on tax evasion-prone general items such as thread, scrap, etc, and is over and above the VAT.

"In a bid to check the evasion of tax by many dealers through bogus firms, the cabinet amended the provisions of the VAT Act to enable collection of advance tax on the entry of certain items into the state," a government spokesperson said.

The excise and taxation department had found that many dealers were floating bogus firms while making huge transactions from outside Punjab without paying any tax. To curb the tax evasion, the Punjab government imposed entry tax on certain items, enriching the state coffers substantially.

Feeling the heat of the tax, some genuine dealers petitioned the Punjab and Haryana high court challenging the entry tax. The high court allowed the petitioners to import goods without paying the entry tax by furnishing an undertaking.

"Taking advantage of the court order, thousands of dealers began submitting undertakings. During the scrutiny, we found that a large number of traders were fly-by-night operators and revenue collections from entry tax came down alarmingly," said a senior government official.

The advocate general office advised the government to amend the provisions of the VAT Act to begin collection under "advance tax" on imported goods.

Sources say that during inquiries it came to the fore that a number of dealers who imported goods into the state either sold them or used them for manufacturing. Later, such traders were not traceable. "Thus they escaped the liability to pay tax due to the state," the excise and taxation department argued before the cabinet.

The department also found that certain unscrupulous dealers were indulging in "benami" transactions by floating firms in the name of someone else. In such "benami" cases, by the time the assessment was framed, the dealers who imported the goods were not available on the given address, said an officer.

Curbing tax theft on cigarettes

The Punjab cabinet on Friday approved "first point taxation regime" on cigarettes to curb tax theft.

Punjab imposes 55% tax on cigarettes and generates about Rs. 125 crore per annum. The excise and taxation department had found that the wholesale cigarette dealers had been getting refund of 55% tax by showing their stock as inter-state sale. Under this strategy, they were paying 2% central sales tax to retain the remaining 53% tax.

Now on, the subsequent sale (after paying 55% tax) of cigarettes will be tax free and there will be no refund or exemption.