The Hindu Business Line : States agree to implement VAT from April `05

The Finance Minister, Mr P. Chidambaram, being welcomed by the West Bengal Finance Minister, Dr Asim Dasgupta, watched by the Minister of State for Finance, Mr S.S. Palanimanickam, at the meeting of the Empowered Committee of State Finance Ministers on VAT, in the Capital on Friday.

New Delhi , June 18

BROAD consensus has emerged among most of the States to implement a value added tax (VAT) regime that would replace sales tax from April 1, 2005.

The phase out of the central sales tax (CST) would now be "co-terminus" with the implementation of VAT. This implies that CST would be phased out by the time VAT is implemented. Indications are that the CST rate would initially be brought down from 4 per cent to 2 per cent before being eliminated.

The consensus on the new date for VAT implementation was conveyed to the Union Finance Minister, Mr P. Chidambaram, at a meeting of the Empowered Committee of State Finance Ministers on VAT held in the Capital on Friday.

Even as most of the States agreed on the new date for implementation of VAT, the State Finance Ministers used the occasion to get a commitment from the Centre that the draft service tax Bill piloted by the Finance Ministry would be thoroughly reviewed and States would be consulted on this matter.

"Except for 2-3 States which have conveyed difficulties, all others have expressed their willingness and commitment to move to a VAT regime from April 1 next year," Dr Asim Dasgupta, Chairman of the Empowered Committee of State Finance Ministers on VAT, told reporters here.

He also said that State Governments would be given some "flexibilities" in dealing with goods of local importance.

On the issue of compensation to States for losses, if any, on the implementation of VAT, Dr Dasgupta said that the Finance Minister has assured the States that any losses on account of implementation of VAT or phase out of CST would be compensated. "These are positive announcements from the Centre, whose support is needed by us for implementing VAT. The principle, quantum and the period of compensation would be decided by the Finance Ministry in consultation with the Empowered Committee by September," he said.

On the draft service tax bill, Dr Dasgupta said that the Empowered Committee argued before the Finance Minister that "the right to taxation of services should be given to the States" and that they should also be allowed to collect and appropriate service tax on "major services" to bolster their revenue base.

Dr Dasgupta said the Finance Minister has assured the States that a fresh review of the draft services taxation Bill would be taken up. "He has promised to consult the States and asked all of them to give their views in writing on this matter," Dr Dasgupta said.

After the Eighty-fifth amendment to the Constitution, the power to levy tax on services has been placed under the Union List. But both the States and the Centre have been permitted to collect and appropriate service tax. The principles on which the States and the Centre would collect and appropriate taxes on services would have to be prescribed by a law passed by Parliament.

The draft service tax Bill, piloted by the Finance Ministry for this purpose, is not acceptable to the States. "We have said that atleast few major items of taxation should be given to the States. We have even suggested that Schedule III in the Bill — the list of services that Centre can only tax and retain the proceeds — should be done away with or merged into say Schedule II (the list of services that centre can tax but share the proceeds with States)," Dr Dasgupta said.

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