| The Centre also agreed on a 3-tier system of compensating the states that incur revenue loss on account of implementation of VAT. |
| The compensation proposal of the technical experts committee to cap compensation due to the states at 10 per cent of the total tax collections of the projected general sales tax (GST) of the state for the relevant year was dropped as it did not find any takers. |
| "I am very happy to report that the empowered committee on VAT has taken some major decisions, including compensation package for states for any loss of revenue (after VAT introduction)," Finance Minister P Chidambaram told reporters after a meeting with state finance ministers on VAT. |
| Chidambaram said the 3-tier package would be "" 100 per cent compensation for revenue loss in the first year; 75 per cent in the second year; and 50 per cent in the third year. |
| The 4 per cent central sales tax would continue in the first year (2005-06), but would eventually be phased out, for which a timeframe would be worked out by the VAT panel. Entry tax in lieu of octroi would continue even under the VAT regime. |
| However, the computation of compensation would be based on the best of 3 out of 5 years rather than the last five year average, starting 2004-05. |
| The Centre would continue to collect special additional duties (SAD) on three items "" sugar, tobacco and textiles "" and share it with the states in the next fiscal. |
| "There would be no change in SAD and CST on these items for 2005-06," Chidambaram said. |
| Asked what would be the outgo of the Centre for compensating states, Chidambaram said, "in our assessment, we expect a surplus revenue to states with implementation of VAT. So, we feel there may not be any requirement for compensation, going by the Haryana experience." |
| However, the finance ministers of some states pointed out that up to 60 per cent of their revenue projections would be adversely impacted due to VAT. |
| "Since central sales tax would amount to about 30 per cent of collections and luxury tax would amount to about 10 per cent, and both will continue to be levied in the current format, 40 per cent of collections would not be affected," a state finance minister told Business Standard. |
| Chidambaram and VAT panel chairman, Asim Dasgupta, would visit Lucknow on November 11 to discuss with the UP government the issues that are impeding the progress on VAT. |
| "We will discuss with UP Chief Minister Mulayam Singh Yadav and sort out the issue," Dasgupta said. He pointed out that 26 states were now ready with the VAT Bills as against 16 when the VAT panel last met two months ago. |
| Ashok Bajpai, the UP agriculture minister, maintained the state government had no difference on VAT with the Centre, but it would agree on the new tax regime only after taking traders into confidence as promised in the elections. |
| The central government and the VAT panel would assist the newly formed states and the hill states in preparing for the VAT regime. |
| Dasgupta said major decisions were taken today "as we finalise the compensation package for possible revenue loss." |
| States have finalised the VAT rates for about 500 items with 250 essential commodities "" agro products, medicine, manufacturing inputs slated to attract a 4 per cent, while 217 other items would attract 12.5 per cent tax. About 41 items like petrol, diesel, ATF, agriculture equipment and newspapers would be exempt from VAT while precious metals like gold and silver would attract only one per cent tax. |
| Sugar, textile and tobacco items would be out of the VAT net but attract SAD. |
| Dasgupta said a national campaign would be launched in first week of December for which a white paper would be prepared. "There will be campaign at the national, state and district levels," he said, adding VAT panel would also have interactions with trading and industry bodies. |
| Groups would be formed with representatives from national level trade and industrial bodies for the campaign very soon. |
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