States may reject VAT hike proposal

'Revision of VAT is states' prerogative'

The state finance ministers are likely to reject the finance ministry's suggestion for increasing the value-added tax rates to 6 per cent over the next two years to compensate them for phasing out of the central sales tax from October 1 this year.

The tax commissioners have, in reports to the finance ministers of their states, suggested that hiking the VAT rate should not be linked to the CST relief as revision of the VAT rate is the prerogative of the states.

A formal response of the states is expected to be finalised at the next meeting of the empowered committee of the state finance ministers on VAT tomorrow.

The tax commissioners have, however, supported other suggestions of the finance ministry, including bringing of sugar, tobacco, textiles, and iron and steel under VAT from April 1, 2007, abolition of Form C and D (covering inter-state sales), and pruning of the declared goods list.

The finance ministry has also submitted a list of 77 intra-state services to the empowered committee on which it has proposed that the states can levy service tax. These include 68 from the list of 124 services suggested by the empowered committee for transfer to the states and nine new services.

The finance ministry had pointed out that revision of the VAT rate from 4 per cent to 6 per cent over the next two years would generate Rs 36,000 crore and VAT on textiles, sugar and tobacco Rs 13,800 crore. Abolition of Form C and D would generate Rs 14,800 crore and pruning of the declared goods list an additional Rs 4,000 crore.

Also, the loss on account of the CST phaseout will be less than the additional projected revenue, barring for the current fiscal, when the CST loss is expected to be around Rs 2,500 crore while the revenue mop-up is expected to be Rs 1,900 crore.