Taxes on a large number of commodities are expected to increase by at least 2 per cent at the state level from April next year when the VAT regime comes into effect despite assurances from the committee of state finance ministers to the contrary. This is expected as the states are going to replace the existing 8 per cent rate of sales tax by at least a 10 per cent floor rate of tax. At present, most of the revenue for several states come from the eight per cent category.
The states are also likely to keep the effective VAT rate at above 12 per cent since they face the prospect of losing at least Rs 8,400 crore if the central sales tax is phased out, the proceeds of which go totally to the state governments(as per tax figures of 1999-2000). The increase is going to be more pronounced for those states which have already implemented the uniform sales tax floor rates.
At present, the two most important rates of sales tax for the state governments are 8 and 12 per cent. The other two rates are zero and 4 per cent which are for food articles and industrial and agro-inputs. The goods that come under the eight per cent floor now include cooked food, electronic goods except TV and VCRs, ceramics, suitcases, sanitaryware, butter and ghee, footwear, paints.
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While the empowered committee has argued that since VAT is a one-point tax it will not raise the prices, sources familiar with the issue say the fear of revenue loss has been effectively used by the states to justify the higher rate of ten per cent.
They also said that as the states have actually asked for a higher effective rate of twelve per cent since most of the final goods are currently charged at that rate the eight per cent group will also end up at around 12 per cent rate of taxation. The commodities currently attracting 12 per cent rate of tax or even higher rates include cutlery, TV, electronic toys, cosmetics, hair oils, watches, articles of stainless steel, motor vehicles and others.
While the GC Srivastava committee is working out a way to compensate the states, the latter have claimed that with Rs 55,000 crore or 52 per cent of their revenue coming from sales tax any tampering with it must be revenue neutral.
Since the Centre does not have the finances to compensate the states, the states' position is likely to be endorsed.