The committee of secretaries set up by the Centre has proposed a declining compensation scale for notional losses incurred by states following their transition to a value-added tax (VAT) regime, starting with a 75 per cent compensation in the first year.
Senior government officials told Business Standard though the states had accepted the declining compensation formula in principle, they differed on the percentage, unanimously seeking 100 per cent compensation in the first year (2003-04), in case the switchover was made on April 1, 2003. The rift between the Centre and the states on the compensation issue can emerge as a roadblock in the countdown to the VAT regime, which has already been postponed for two years.
Having received responses from about a dozen states, the committee, set up under additional secretary (revenue) Anupam Dasgupta, is waiting for the other states to get back to it before taking a final view.
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The committee, in its interim report sent to all the states, suggested 75 per cent compensation in the first year, including revenue accruing to the states from the tax on select services and items where additional excise duty was levied following the shift to the VAT regime, the officials said.
As per the declining compensation scale, the package will be limited to 50 per cent in the second year and reduced subsequently. It will eventually be phased out after the third year, 2005-06.
Government officials said the states were yet to firm up their position on the extent of compensation in the last two years. A senior Delhi government official said the states were likely to chalk out their compensation claims for the subsequent years in the next meeting of the empowered committee of state finance ministers, scheduled for next week.
The committee's proposal will largely cover the revenue loss to the states from the complete phase-out of central sales tax (CST) over the three years. While the states have factored in the loss of revenue from the phase-out, the shift to the new tax regime is also expected to cost the states initially.
Apart from discrepancies on the compensation issue, there is the issue of the states demanding to be allowed to impose entry tax to partly compensate for the loss of revenue from the CST phase-out, which is being opposed by the Centre.
The Dasgupta committee recommendations follows the compensation package worked out by a committee headed by former additional secretary (revenue) G C Srivastava, which had suggested a 50 per cent compensation to the states for notional revenue losses, along with allowing states to tax 51 services and collect additional excise duty on items directly. The states had rejected the recommendations, and had pitched for higher monetary compensation, which led to the postponement of the VAT schedule from April 1, 2002 to next year.