Panel rules out VAT rate hike

[Sukumar]

An official panel has ruled out any increase in VAT rates as part of
a package to compensate states on account of revenue loss due to a one
percent cut in Central Sales Tax that was to have happened in the
beginning of this fiscal.

"Yes, there would not be any increase in VAT rate now," Empowered
Committee of State Finance Ministers on VaT Chairman Asim Dasgupta
told reporters in New Delhi on Tuesday in response to a query whether
the panel is ruling out a hike in the state tax rate.

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

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

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

"This was a very positive meeting. We wanted to reach a point of
convergence relating to compensation for loss to the states on account
of reduction of CST from three to two percent. We have worked out the
details and discussed with Finance Minister," he said.

Sources said the Union Finance Ministry has suggested to states to
increase VAT rate from four to five percent on intermediate goods this
fiscal and to six percent next fiscal to partly compensate for losses
due to proposed cut in CST rates.

States, however, did not agree to this, particularly when "prices are
rising", the sources said.

The states suggested that the Centre should go for constitutional
amendment to allow them to impose VAT on imports to partly meet the
losses, the sources said, adding that the remaining losses should be
met by the Budgetary support.

However, Dasgupta said Union Finance Ministry does ask states to do
this or that.

CST is a tax imposed on inter-state sale of goods and comes in the way
of a common Indian market, aimed to be created by the state level VAT
and the proposed Goods and Service Tax.

CST was reduced from four percent to three percent last fiscal and was
scheduled to be further cut to two percent from 1st April this year.

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

In his Budget speech, Chidambaram had said, "It (CST) is now proposed
to reduce the rate to 2 percent from April 1, 2008. Consultations are
underway on the compensation for losses, if any, and once agreement is
reached the new rate will be notified."

When asked whether CST would be cut with retrospective effect from 1st
April 2008, Dasgupta said tax matters are not usually implemented with
retrospective effect.

"April one has gone. We will do it as soon as possible," he said.

Though, Dasgupta did not attach a number to the losses that states
would face, it is estimated that it is more than Rs 6,000 crore when
CST was cut from four to three percent.

As part of compensation package last fiscal, states were also asked to
impose tax on 44 services, but states did not come forward because
most of these services were local in nature, which would have not have
given much revenue to states.

VAT panel to submit report on GST by month end

The Empowered Committee of State Finance Ministers on VAT will submit
a report relating to broad framework of goods and service tax (GST) to
the Finance Ministry by the month end.

Finance Minister P Chidambaram has announced that the GST will be
implemented throughout the country with effect from 1st April 2010.

"GST model and its roadmap is being finalised by the Empowered
Committee and we will submit it to the Finance Minister by the end of
this month," Empowered Committee chairman Asim Dasgupta told reporters
after the panel's meeting with the Finance Minister in New Delhi on
Tuesday.

Dasgupta, who is also the Finance Minister of West Bengal and has been
instrumental in the implementation of VAT, said, "It (GST) will be a
dual VAT," while declining to give further details of the
recommendations.

Sources said while multi-point levies may be integrated into state-
level GST, single-point levies such as octroi may remain with each
state.

Earlier, the panel had decided to set up a joint working group
comprising state finance secretaries, commissioners of commercial
taxes and joint secretaries concerned in the Union finance ministry.

Sources said the goods are likely to have two taxes, one by the Centre
and other by the states.

However, services are likely to be covered by central tax only.

While panel has not so far revealed the recommended GST tax rates, the
industrial chambers have demanded that the GST rates should be around
20 percent which would include an average 12 percent cenvat or service
tax at the Centre and 8 percent state level taxes.

Sources said like VAT, there would be set off that is the amount of
tax paid on inputs would be reimbursed at both the central and state
levels.

GST at the state level will subsume as many taxes on goods and
services as possible and feasible.

N.Sukumar
Research Analyst
www.kences1.blogspot.com