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Centre, States agree on VAT compensation package

By Our Special Correspondent

NEW DELHI, NOV. 2. In a significant move towards introduction of a country-wide Value Added Tax (VAT) system, the Centre today agreed on a revenue compensation package while all States, barring three, have prepared the required legislation. Disclosing this here today after a meeting of the Empowered Committee on VAT, the Finance Minister, P. Chidambaram, said some major decisions had been taken including the compensation package for States for loss of any revenue after launching of VAT. He clarified that the 4 per cent sales tax would continue during the first year — 2005-06 — but would eventually be phased out. The time frame was to be worked out by the VAT committee.

Three-tier package

On the three-tier compensation package, he said it would be 100 per cent compensation for revenue loss in the first year, 75 per cent in the second year and 50 per cent in the third year. Going by the experience of Haryana, however, he felt that there might not be any need for compensation as VAT implementation was expected to lead to a surplus revenue scenario in States.

He said as many 26 States were now ready to put VAT legislation into place, leaving only three yet to finalise it, including Uttar Pradesh. Mr. Chidambaram and the Chairman of the Empowered Committee, West Bengal Finance Minister Asim Dasgupta, would be going to Lucknow on November 11 to discuss issues in the way of progress on VAT with the U.P. Chief Minister, Mulayam Singh Yadav.

According to the U.P. Agriculture Minister, Ashok Bajpai, the State had no differences on VAT, but preferred to take traders into confidence as had been promised in the elections before going ahead with the new tax system. The other two laggard States were believed to be Manipur and Nagaland.

Mr. Dasgupta told reporters that 16 States had been ready with VAT bills two months ago, but now as many as 26 States had finalised the legislation. He expected that Presidential assent for the bills would be available by December and the laws would be in place by January.

On the method of computing compensation, he said it would be based on collection figures provided by the Accountant General of India. It would also be calculated on the basis of the average of three best years of tax collections prior to 2004-05. Besides, he said the Central Government would continue to collect special additional duties (SAD) on three items — sugar, tobacco and textiles — and share it with the States in the next fiscal. Both SAD and CST would remain unchanged on these items during 2005-06.

Rates finalised

The VAT rates have been finalised for about 500 items with 250 essential products pegged at 4 per cent and 217 other items at 12.5 per cent tax. Another 41 items including petrol, diesel, aviation turbine fuel and newspapers would be exempt from VAT while gold and silver would attract only one per cent tax.

Mr. Dasgupta said a national campaign to build awareness about VAT would be launched in early December for which a white paper would be prepared. The VAT panel would also have interactions with trading and industry bodies for the campaign, he said.

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