As part of its initiative to accelerate economic reforms, the Atal Bihari Vajpayee government is set to compensate states for the possible revenue losses after the imposition of the value-added tax (VAT) regime from April 1, 2002.
Finance ministry sources told Business Standard that the Centre is also likely to allow states to tax services, particularly those which are of a local nature.
They added that a roadmap relating to the compensation for revenue losses after the imposition of VAT, and the identification of services, would be done on the basis of the recommendations of the expert groups looking into these aspects. Both the groups, headed by the additional secretary, revenue, are slated to submit their reports by the end of this month.
The states are of the view that despite the general VAT rates being fixed after taking care of the revenue neutrality, the new system will need a few years to stabilise. They have also raised apprehensions about the possible loss of tax revenues during the initial few years following the application of VAT.
The states have also asked for a quarterly review of their revenue collection, in order to take stock of any possible losses during the initial few years following transition to the VAT system.
The revenue loss to the states due to the VAT system is expected to be mainly on account of the phase out of the central sales tax (CST), which is seen as a necessity for the VAT regime to avoid cascading of taxes.
Sources said that it would be difficult to abolish CST in one go, as it forms a substantial part of the tax collection of the states, especially that of the trading states such as Delhi and others.
They added that a reduction in the CST rate from 4 per cent at present to a marginal level of 1 per cent was likely to be done in a phased manner.
The states in their last meeting on the issue held on July 4, decided to advance the preparatory time schedule for ensuring the introduction of VAT by states by the April 2002 deadline.
Under the new schedule, states and Union Territories would firm up VAT laws and procedures by August 15 and interaction with trade unions would be completed by September 30.
Following this, all states will be required to finalise the VAT legislation and submit it to the Centre for approval by October 31. The Centre has to obtain the Presidential assent for the legislation by November 15 this year, as per schedule.
