The Hindu : States agree to introduce VAT from April 1

Online edition of India's National Newspaper
Tuesday, Jan 21, 2003

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States agree to introduce VAT from April 1

By Our Special Correspondent

NEW DELHI JAN. 20. With the Centre agreeing to compensate States up to 100 per cent for any revenue loss due to the introduction of Value Added Tax (VAT) in the first year, the States have reiterated their commitment to introduce this new taxation measure from April 1 this year.

The Centre has agreed to the States' demand for 100 per cent compensation of revenue loss in the first year (2003-04), 75 per cent in the second year and 50 per cent in the third year. This compensation package would take into account the additional revenues to States from tax on services as well as on sugar, textiles and tobacco.

The States, on their part, have decided that all their VAT legislation would have common provisions in respect of all important matters and a simple VAT law will replace the existing plethora of State laws such as those on sales tax, turnover tax, purchase tax, entry tax, and the like. All States and Union Territories have also decided to send their draft VAT Bills by January 31 for Presidential assent.

The VAT by the States would have two basic rates of 10 per cent and 12.5 per cent, which would be revenue neutral rates for most items. Besides, there would be four more rates with nil for defence and strategic items, one per cent for precious metals, 4 per cent for essential agricultural items and 20 per cent for demerit goods such as alcohol and tobacco. The two basic rates have been selected so that States, which have lower sales tax rates, could raise it to 10 per cent while those levying higher rates of 17-18 per cent would have to lower them to 12.5 per cent. Over time, the VAT rates would be merged into one uniform rate.

It has also been decided to phase out Central State Tax (CST) within three years with the introduction of VAT as this caused distortions in internal trade and impeded development of a common market. Also, the year-wise schedule of phasing out of CST and the package of Central compensation in this context would be finalised within a week between the Union Finance Ministry and the Empowered Committee of State Finance Ministers. The question of CST on industrial raw material would also be examined by this committee.

In another measure to augment States' revenues, it was decided that the Centre would introduce, during the forthcoming Budget session of Parliament, a Constitutional Amendment Bill permitting States and Union Territories to collect and appropriate tax on some services. It was decided that three lists would be drawn up — one where the Centre would collect service tax, second where States would appropriate the tax and third negative list to ensure that the Government and social services are not subject to service tax. However, the rates of service tax would be fixed by the Centre.

An amendment would also be moved to the Additional Duties of Excise (Goods of Special Importance) Act to empower the States to levy sales tax or VAT on sugar, textiles and tobacco with the ceiling rate of 4 per cent with effect from June 1 this year. This will be done without affecting the existing levy of additional duties of excise on these items by the Central Government. The States have also agreed to adopt a uniform floor rate of one per cent of tax on these three commodities.

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