FM, Dasgupta discuss VAT implementation

States against Centre's move to cut taxes for medicines

Finance Minister P Chidambaram met the chairman of the empowered committee on value added tax (VAT), Asim Dasgupta, to evaluate the progress made by states in the implementation of the new tax regime from April 2005.

The meeting assumes importance in the light of United Progressive Alliance government's promise to compensate states for the revenue loss, if any, when VAT comes into being partially replacing the 4 per cent Central Sales Tax.

The states have finalised VAT rates for about 500 items with 250 essential commodities including agro products, medicines and manufacturing inputs slated to attract a 4 per cent tax, while 217 other items will attract 12.5 per cent tax.

About 41 items like petrol, diesel, aviation turbine fuel, agricultural equipment and newspapers will be exempt from VAT, while precious metals like gold and silver would attract only 1 per cent tax. Sugar, textile and tobacco items will be out of the VAT net.

The empowered committee on VAT will soon come up with a formal list of items and the tax rates.

The VAT panel, which met here yesterday to iron out differences, also took up with Chidambaram the issue of a compensation package for any revenue loss when they switch over to the new tax regime.

The panel is in the process of harmonising and fine-tuning the VAT legislation, which have to be passed by the respective state Assemblies. The bills will then be sent to the finance and law ministries for further vetting before going to the President for his assent.

Meanwhile, states have been dismissive of the Centre's suggestion to cut the taxes and advance the date of implementation of VAT regime for medicines, but have agreed on a proposed drug price monitoring system to bridge the gap between high retail rates and much lower manufacturing costs.

At a conference held here today, it was decided to bring those drugs which have an annual turnover of between Rs 1 and 4 crore under a monitoring mechanism to control their prices.

"So far we control and fix prices of only those drugs which have an annual turnover of over Rs 4 crore, but now it is proposed to monitor the rates of those medicines which come under the Rs 1- 4 crore category," Chemicals Minister Ram Vilas Paswan said after the conference.

He said this would not mean that these drugs would be fully controlled or that their prices would be fixed by the government, but only that their rates would be monitored, ensuring that 80 per cent of the pharmaceutical sales would be covered.

Paswan said the issue of advancing the date for reduction of sales tax on drugs from 8 to 4 per cent under the proposed VAT regime due for implementation from April next could only be taken by the concerned high powered committee.

However, states felt there was a large scope to reduce the drug prices even without tinkering with taxes in view of the huge margins enjoyed by the traders, he said.

There was a general consensus that the manufacturing cost should also be mentioned on the medicines to arrive at the trade margins.