The central government today asked states to widen the scope of value-added tax (VAT) to include various distribution chains."The implementation of VAT in its first year in 2005-06 was smooth. However, input tax credit to the manufacturing sector had reduced revenues for states and expanding its ambit would help make up for the drop in collections," Parthasarthi Shome, advisor to Finance Minister P Chidambram, said at a seminar on VAT organised by Indian Merchant's Chamber today.Shome said states not using extreme measures to enforce VAT so far was understandable as businesses and manufacturing were new to the tax system, but would now need to "take steps" to improve compliance.States like Maharashtra and Karnataka are likely to have lower revenue realisations with the adoption of VAT as they have large manufacturing bases and products get consumed across the country. These two states would be compensated for any loss of revenue, he added.Sensing the relatively hassle-free performance of VAT, states like Tamil Nadu and Pondicherry, which had expressed reservations about the new tax regime, have decided to implement it. Even the Uttar Pradesh government recently said it is not opposed to VAT, but need to consult the trading community in the state before adopting it, he said.
