States not for VAT rate hike

State governments have opposed the finance ministry's proposal to raise the value-added tax (VAT) rate on a number of items from 4 per cent to 5 per cent.

The move was suggested to compensate states for losses due to reduction in the central sales tax (CST) rate by one percentage point from April this year. States also declined to levy VAT on textiles.

"Most states did not favour the proposal to raise the VAT rate and imposition of VAT on textiles," said a government official, referring to today's meeting between the Empowered Committee of State Finance Ministers and Finance Minister P Chidambaram to discuss compensation to states for the projected losses.

With the CST rate set to be cut from 3 per cent to 2 per cent, states are bargaining hard for the expected loss of Rs 12,000-13,000 crore in 2008-09.

Sources say states want the central government to compensate them in other ways"" like giving them all collections from the tax on additional services.

Many states told Chidambaram that raising VAT rates and imposing VAT on textiles would not be feasible in view of the coming elections in their states. At present, the central government levies additional excise duty on textiles and distributes the revenue from it among states.

In 2007-08, the central government reduced the CST rate from 4 per cent to 3 per cent and announced a package to compensate states for the estimated revenue loss of around Rs 6,000 crore.

The package comprised transfer of the entire revenue from the 33 services taxed by the Centre, collections from VAT on tobacco and removal of Form D.

The Centre also proposed to transfer revenue from 44 more services, but many states said no as most of these services are local.