4% VAT levied on inputs, capital goods, drugs

Petrol & diesel, salt, bread, khadi, gur, jaggery to be exempt from VAT.

The empowered committee of state finance ministers on the value-added tax (VAT) has decided that all industrial inputs, medicines, medical equipment and devices will attract a uniform 4 per cent tax. The VAT panel met today to work out common tax rates for states.

The 4 per cent rate will also apply to capital goods, barring a small negative list of items like building materials.

The chairman of the empowered committee, Asim Dasgupta, said the 21 states that had signed up for the VAT would notify the rates by the end of this month.

Dasgupta said the committee would take some time to finalise its view on life saving drugs. Till then, such medicines will continue to attract 4 per cent VAT.

He said a view regarding petroleum products had also been taken. "Diesel and petrol will be out of VAT," he said.

The committee also decided to expand the list of exempt items to include branded and unbranded salt, all kinds of bread, khadi, gur, jaggery and goods distributed through the public distribution system.

States have been given the option to impose either VAT, 4 per cent or no tax on atta, maida and suji. An option of 4 per cent or 12.5 per cent VAT rate on dry fruits has also been given to states.

Finance Minister P Chidambaram, who briefly attended the meeting, assured states that the Centre would soon finalise a compensation package for possible losses, if any. While the Centre has set aside Rs 5,000 crore, it is willing to provide more.

"The compensation package announced earlier was based on a design approved by the empowered committee. However, several states have deviated from the rates set out in the white paper. A decision has to be taken on whether such deviations will be compensated or not," an official said.

Officials said the empowered committee would not deduce the losses for compensation on account of minor variations in rates. However, substantial losses because of differences in the VAT rates for certain goods are under consideration and will be finalised soon.

National Institute of Public Finance and Policy's Director M Govinda Rao said today's decision was unlikely to result in a revenue loss for states but might result in lower compliance.

Dasgupta said from May, representatives of the empowered committee would start visiting the non-VAT states to convince them.

He said the committee would also hold a meeting with the traders to resolve any procedural difficulties.

Meanwhile, traders have decided to submit protest memorandums to governors of each state on May 5.

Unified rate

• The VAT panel will take some time to finalise its view on life saving drugs. Till then, such medicines will continue to attract 4% VAT
• The list of exempted items will be expanded to include goods, including salt and items distributed through the PDS
• Diesel and petrol will be out of VAT