Unless the states agree to give up their demand for residuary taxation powers on services, top officials said the next value-added tax deadline of April 1, 2003 will also be difficult to implement.
Government sources said today that contrary to the claims of the states that the present deadline was postponed because it was they who were not ready. The sources said while the delay in the passage of the central legislations will not hold up the switchover, none of the states have been able to pass the legislation to change over to VAT without which they would not be empowered to tax on VAT basis. Sources said one of the state infact sent the model VAT legislation to the centre yesterday, compared to the deadline drawn up by the empowered committee to have all relevant legislations in place by November 2001.
The states were also insistent that the residuary powers to levy service tax should be left to the states. They said the states were demanding that while the government should pass a constitutional amendment to rationalise service taxation, the bill should include such a clause but that was unacceptable to the Centre. In fact, service taxation was the critical bone of contention between the centre and the states in the run up to the VAT deadline. On the issue of compensation to states the centre, based on a report from NIPFP had contented that there would be no loss of revenue which the states have denied. Source said the problem had arisen because the states have transferred too many commodities to the 4 per cent rate of tax compared to the existing 8 or 12 per cent rate.
This would make the commodities cheaper earning kudos for the states but reduce the revenue after introduction of VAT.