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Hema Ramakrishnan
Shaji Vikraman

NEW DELHI, Nov. 28

STATES have virtually shot down the recommendation made by the Kelkar panel on indirect taxes to enter into a "binding agreement" with the Centre on levy and collection of any tax by them in the value added tax (VAT) regime.

The Task Force, in its consultation paper, had pointed out that a constitutional guarantee should be in place to ensure long-term stability of VAT. "The VAT system runs the risk of getting off-track on account of multiple taxes by some of the State governments in future. Therefore, a mechanism backed by constitutional provision is required to facilitate a binding agreement between States and between the Centre and States," according to the paper.

Although a member of the panel made out a case for the States to have a binding agreement with the Centre at the Empowered Committee of State Finance Ministers on VAT here, it was shot down by several States.

"As States have voluntarily agreed to switch over from the sales tax regime to a VAT regime by April 1, 2003, there is no question of reneging on the commitments in the new dispensation," said a top State Government official.

Dr Vijay Kelkar also told the Empowered Committee that the Centre was committed to compensating States on the possible losses in view of the transition to VAT. Apart from basic sales tax, States also levy additional sales tax and other surcharges — revenues from which will have to be forgone when VAT is implemented.

The Finance Minister, Mr Jaswant Singh has, in fact, cleared the proposal for providing a 100 per cent compensation to States in the first year of implementing VAT — i.e. during fiscal 2003. Although States want a tapering compensation over a three-year period, no further commitment has been made by the Centre beyond April 2003, said official sources.

As per the agreement among States, there will be a general VAT rate, which will have a floor of 10 per cent. The actual rate will be fixed by the respective States depending on the revenue neutral rate (RNR) of that particular State, which will not exceed the ceiling of 12.5 per cent.

The Centre is also set to seek Cabinet's approval soon to bring in Constitutional amendments that would enable the States to levy and collect service tax. It is targeting the ongoing winter session to table the Bill, whose passage would bolster revenues of States.

A host of States including Gujarat, Maharashtra, Tamil Nadu and Karnataka — have also sought a slower phase out of the Central sales tax and a permanent compensation.

The Finance Ministry has, however, taken a decision to retain CST at four per cent during the first year of implementing VAT. The rate would be reduced to two per cent and one per cent, respectively, during 2004-05 and 2005-06. The levy will be abolished in 2006-07.

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