The Centre will set the new rates for service tax on all sectors, including those to be taxed by states, through a legislation in the Budget session of Parliament.
Additional secretary (revenue) in the finance ministry, Anupam Dasgupta told reporters today, that it has also pegged two revenue neutral value added tax (VAT) rates of 10 and 12.5 per cent.
He said this was decided at a meeting between the state finance ministers and finance and company affairs minister Jaswant Singh last week to take a fresh commitment on introducing countrywide Value Added Tax from 1 April, 2003.
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He said the legislation would follow a constitutional amendment in the same session, that would give specific powers to the Centre to legislate on services.
According to him introduction of VAT would have a softening effect on the general price level in the country.
Dasgupta said this was part of the agreed package to augment the revenue streams of the states that also included giving them the power to levy additional excise duties at the maximum rate of four per cent on sugar, textiles and tobacco.
But this would not disturb the existing powers of the Centre to levy excise duties on thse commodities. The Finance Bill for the budget for the next fiscal year would include this provision.
The additional secretary said the meeting has also decided to rework the phase out of Central Sales Tax, which is levied upon interstate movement of goods.
He said a committee of officials would consider a compensation package for the states, since CST contributes about Rs 13,000 crore to the states and review the earlier plan to keep it undistrubed at four per cent in 2003-04, and reduce it gradually to two per cent and one per cent next.
The meeting of the finance minister has also accpeted the recommendation of another committee to give 100 per cent compensation to states for possible revenue loss because of switching over to VAT from the current sales tax regime.
Dasgupta said the compensation would come down to 75 and 50 per cent in the next two fiscal years.
He however added that the Centre was confident that the states would actually gain in revenue from the very first year.
The states have also decided to send in their VAT legislations by the end of this month to be vetted.
He said Singh had told the meeting this was necessary to ensure the respective laws were simple and uniform on their significant provisions.