Tamil Nadu is on the road to a VAT regime, with preparations to shift from January 1 on schedule, according to the Chief Secretary, Mr L.K. Tripathi.

At a news conference to highlight the State's efforts to implement VAT, he said that VAT on goods and commodities will only have dampening effect on retail prices.

The Government has announced measures to address the concerns of the small traders and allay their fears on the shift to a new tax regime.

Traders with turnover of up to Rs 10 lakh with business entirely within Tamil Nadu have been exempted from VAT, while all traders with a turnover of up to Rs 5 lakh have been exempted.

Traders with a turnover of up to Rs 50 lakh have the option of paying compounding tax of 0.5 per cent. Exemptions, deferrals granted under the Sales Tax regime are to continue. The effective tax rate in the State has dropped from 16 per cent to a peak rate of 12.5 per cent. Paperwork will also be simpler as the tax filing is on a self-assessment basis.

VAT ensures that Tamil Nadu joins the tax mainstream, he said.

States that have shifted to VAT have observed buoyancy in tax revenues after an initial dip.

Citing numbers, he said that between April and August this year, overall revenue growth in the States that shifted to VAT was 26.2 per cent compared to the corresponding previous period.

Fears of a price increase of essential goods are unfounded, as the State Government has taken care to retain the overall tax rates in the case of those that were taxed at four per cent even if VAT provides for levying 12.5 per cent.

The exemptions on major commodities granted under VAT are being been continued even if they are not in line with VAT as envisaged by the empowered committee, he said.

The Home Secretary, Ms S. Malathi, till recently the Commercial Taxes Commissioner, said that sales tax revenue between March and November stood at Rs 12,885 crore against total revenue of Rs 16,615 crore in 2005-06. (In 2004-05 it was Rs 13,908 crore.)

Entry tax on goods and vehicles is to continue. It would be subject to VAT and the entry tax rates are being aligned with VAT rates, she said.

With the procedural simplification and overall tax rates coming down, and the VAT system encouraging compliance, the tax base is expected to improve. As of now, over 3.86 lakh traders are registered under general sales tax. Of these, 2.80 lakh have registered under VAT and more are expected in the coming week.