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Panel rules out any increase in VAT rates

NEW DELHI: The Empowered Committee of State Finance Ministers on Tuesday ruled out any increase in VAT (Value Added Tax) rates as part of a package to compensate States on account of revenue loss due to the proposed one per cent cut in the Central Sales Tax (CST).

“Yes, there would not be any increase in the VAT rate now,” committee Chairman Asim Dasgupta told reporters here.

There was no need to increase the VAT rate at all, particularly when inflation was on an upswing, he added.

The VAT panel members met Finance Minister P. Chidambaram to reach an agreement over a package for States on account of losses due to the proposed cut in CST from three to two per cent for this fiscal.

The intended cut, however, did not happen since there was no agreement on compensation.

Mr. Dasgupta said, “This is a positive meeting. We want to reach a point of convergence relating to compensation for loss to States on account of reduction of CST from three to two per cent. We have worked out the details and discussed with the Finance Minister”.

Sources indicated that the Union Finance Ministry had suggested to States to increase the VAT rate from four to five per cent on intermediate goods this fiscal and to six per cent next fiscal to partly compensate for losses due to the proposed cut in CST rates. But the States did not agree since the prices were rising.

The States have suggested that the Centre should go for constitutional amendment to allow them to impose VAT on imports to partly meet the losses, adding that the remaining losses should be met through budgetary support.

The CST was reduced from four per cent to three per cent last fiscal and was scheduled to be further cut to two per cent from April 1.

It is ultimately, proposed to be reduced to zero by the time GST is introduced from April 1, 2010.

In his Budget speech, Mr. Chidambaram had said, “It (CST) is now proposed to reduce the rate to 2 per cent from April 1. Consultations are under way on the compensation for losses, if any, and once the agreement is reached and the new rate will be notified.”

Asked whether the CST would be cut with retrospective effect from April 1, Mr. Dasgupta said tax matters were not usually implemented with retrospective effect. “April 1 has gone. We will do it as soon as possible,” he said.

Mr. Dasgupta has not attached a number to the losses that States would face. However, the States estimated that the losses would be more than Rs. 6,000 crore when CST is cut from four to three per cent.

Incidentally, last fiscal also States, as part of the compensation package, were asked to impose tax on 44 services but they did not come forward to do so since these services were local in nature and would not have given much revenue to them.

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