FMs' meet to work out uniform VAT

Margin of variation to be defined; centre to compensate for loss in revenue

Finance Minister P Chidambaram will attend a crucial meeting of the Empowered Committee of State Finance Ministers on value-added (VAT) tax tomorrow.

Officials said the most important issue to be discussed at the meeting was the degree of variations in VAT rates that could be allowed to states.

"Another issue will be the extent to which the variance, if allowed, can be compensated by the Centre to states," an official said.

It was agreed at the level of state sales tax commissioners to adopt the Harmonised System of Nomenclature for products so that there was a common product code for items.

Officials said another proposal a decision would be taken on was to expand the list of ten items of local importance to states for exemption from the VAT.

The meeting is also expected to discuss the 20 per cent sales tax on petrol and diesel as proposed by the empowered committee in its white paper.

Empowered Committee Chairman Asim Dasgupta met Chidambaram this morning. He said he had come to invite Chidambaram to tomorrow's meeting and that the finance minister had agreed to attend it.

Dasgupta, who briefly chaired the meeting of state sales tax commissioners today, said he was optimistic that an agreement would be reached at tomorrow's meeting.

"We are collecting information from all 20 states (that have implemented the VAT so far) and tomorrow, we will discuss it," he said.

Dasgupta, the finance minister of West Bengal, also said variations in rates were not very significant but the issue was of prime importance on the empowered committee's agenda.

The state finance ministers had, in their last meeting on April 16, failed to reach a consensus on the question of putting in place uniform VAT rates. It was decided that states would submit their data to the empowered committee so that it could analyse on which items the rates were varying among states.

Meanwhile, the number of states implementing the VAT (including the National Capital Territory of Delhi) has increased to 22 with Meghalaya also joining the list.

In the non-VAT states, however, manufacturers have reported a shortage of raw material. This, they say, is because of the confusion over billing for goods traded between states that have implemented VAT and non-VAT states.

According to Associated Chambers of Commerce and Industry of India (Assocham), this situation has been created by raw-material suppliers in VAT-implementing states by holding back their stocks from manufacturers in non-VAT states.

Feedback to Assocham from its constituent chambers in the country regarding uneven execution of the VAT also revealed that traders and political system of non-VAT states were under pressure from manufacturers for restoring supplies of raw material.

In a release, Assocham said the problem was particularly acute in engineering, textiles, consumer goods and automobile sector. Assocham President MK Sanghi said a large number of manufacturers in northern India had complained of a severe shortage of raw material, faced by their industrial units in different sectors on account of confusion on billings for goods.

As a result, monthly production targets of industrial units located in Uttar Pradesh, Himachal, Uttaranchal, Rajasthan and Madhya Pradesh may be affected.

Sanghi urged all states to adopt the VAT without any delay to facilitate smooth movement of raw material between VAT-implementing states and those which are yet to join the league. Sanghi also wanted states to address the irritants hampering the smooth operation of the VAT.

Sanghi said, "Even in the southern part of the country, where most states, barring Tamil Nadu, have adopted the VAT, many manufacturers are not comfortable as their raw material supply is getting adversely affected. This is because raw material has to pass through Tamil Nadu which is yet to implement the VAT."

Manufacturers in Maharashtra face a similar problem as their supply of raw material has turned erratic. This again was because the billing confusion was getting compounded every day between Gujarat (a non-VAT state) and Maharashtra, and raw material that manufacturers in Maharashtra receive for key sectors was routed through Gujarat, the Assocham chief said.