Govt sweetens VAT deal

21 states on board, composite tax cut to 0.25%.

The empowered committee of state finance ministers on the value-added tax today doled out a sweetener to nearly half the traders in the country by reducing the tax liability under the composition scheme from 1 per cent to 0.25 per cent.

Traders with a turnover of up to Rs 5-50 lakh can opt for the composition scheme, but they will not be entitled to claim the VAT credit.

Asim Dasgupta, chairman of the empowered committee and West Bengal finance minister, also announced the road map for the removal of the central sales tax by 2007-08 subject to additional compensation from the Centre and implementation of the tax information network.

The central sales tax is proposed to be halved to 2 per cent from April 2006 and will be done away with from April 2007. States like Rajasthan had sought a clear road map on the phasing out of this levy.

Today's initiatives are aimed at persuading the Bharatiya Janata Party-ruled states to shift to the VAT from April 1.

The committee had earlier allowed states to raise the exemption limit on annual turnover from Rs 5 lakh to Rs 10 lakh. Dasgupta said the committee would review the VAT rates of 4 per cent and 12.5 per cent in June 2005.

This follows a demand made by some states to introduce a VAT rate of 8 per cent. At today's meeting, 21 states reaffirmed their commitment to implement the VAT from April 1. Uttar Pradesh, Uttaranchal, Tamil Nadu and the five BJP-ruled states -- Gujarat, Rajasthan, Madhya Pradesh, Chhattisgarh and Jharkhand -- are opposing the move.

The ministers of the eight states that are not implementing the VAT were not present at the meeting. They were represented by senior officials.

Dasgupta said he met BJP leaders to press for introduction of the VAT in the five states ruled by the party. He is also scheduled to meet Uttar Pradesh Chief Minister Mulayam Singh Yadav next week and the empowered committee is also in talks with Uttaranchal and Tamil Nadu.

At least two states, Punjab and Assam, sought action from the Centre, including stopping central grants, against states that did not meet the April deadline.

Finance Minister P Chidambaram, who attended the meeting, said he had urged the states not to miss the historic opportunity to add a new dimension to the Centre-state relationship.

"I told the empowered committee that the VAT is your law, the tax is your tax. You are the decision-makers," the minister said.

Dasgupta said the committee had recommended that petrol and diesel be kept out of the VAT, while cooking gas should be part of the VAT schedule. The committee is in talks with the Delhi government on compressed natural gas.

Officials pointed out that the committee had earlier stated that all petroleum products should be kept out of the VAT. During the meeting, Dasgupta also asked members to consider the possibility of imposing a one-time VAT on the maximum retail price (MRP) of medicines, following a representation on the issue from the drug industry.

VAT logjam worries PM

Prime Minister Manmohan Singh today voiced his concern over the loss of the "implicit consensus" among political parties over the introduction of the value-added tax (VAT) from April 1.

"Almost all state governments, and even the major political formations, were on board on VAT. Yet, today, it is saddening to see this political consensus weakening," Singh said in his address at the annual Business Standard awards function.

Without naming the Bharatiya Janata Party (BJP), Singh said, "We need to introspect and see if we are not placing ourselves in the unenviable position of talking in different voices to suit the occasion."

"The political consensus that has been the bedrock of the reform process since 1991 has been implicit rather than explicit. Many of the major issues of reform, ranging from tax and tariff cuts to changes in FDI ceilings, have been the subject of discreet consensus. Such consensus is rarely stated in public, but has often been displayed in the execution of policy," Singh said.