States underplay VAT gains to get aid

Are states deliberately underplaying their tax buoyancy under value-added tax in order to obtain compensation from the Centre? The finance ministry is worried because Karnataka, which registered a growth in tax revenue in the first quarter, is now suddenly seeking a compensation of Rs 394 crore from the Centre for the first four months of the fiscal.

The Centre has so far released Rs 246 crore as compensation under the VAT for the first quarter. Bihar has been granted compensation of Rs 47.31 crore, Andhra Pradesh has been granted Rs 193.80 crore, while Tripura has been granted Rs 4.89 crore compensation for April-June 2005-06.

Officials told Business Standard that as per the earlier data compiled by the state, Karnataka had registered a 16 per cent growth in their net tax collection, excluding petroleum products, while it had registered a 27 per cent increase in its gross tax collection up to July.

"Since they have now approached the Centre for compensation citing different figures, the finance ministry has asked them to explain their new data which shows a dip against the earlier data showing a growth," an official said.

Kerala has now also sought VAT compensation. Officials said the state was likely to get around Rs 250 crore compensation for the first quarter. "The Centre has sought some clarifications including the Attorney General's certificates from the state," an official said.

Maharashtra was another state which was likely to be given compensation under the VAT for the first quarter. Officials said that the centre was still awaiting a revised compensation proposal from the state. The earlier proposal had been sent back as it was not in conformity to the norms that had been finalised by the empowered committee.

The Centre has earmarked Rs 5,100 crore as compensation for value-added tax for 2005-06. States will be compensated up to 100 per cent for losses suffered under the new tax regime during the first year

Officials pointed out that in the last meeting of the empowered committee of state finance ministers on VAT, a proposal to undertake a study on the revenue trends under VAT was discussed.

'States agreed to a proposal to have a study undertaken by the Kerala-based Centre for Taxation Studies,' an official said adding that this would now be fowarded to the Centre for approval and funding.

Meanwhile, efforts are also on to boost progress of the Tax Information network system - TINXYS. Officials said that Uttar Pradesh and Maharashtra have now agreed to adopt TINXYS taking the total number of states to 16.

While 50 per cent of the cost of the project of Rs 30 crore for five years is being borne by the Centre, the finance ministry has asked the empowered committee to suggest a fresh formula to work out the share of each state to generate the remaining cost of the project.

The EC had suggested that states would beat the liability in the ratio of the Central Sales tax realised by them during 2004-05. An analysis of the CST done by the ministry shows that this would not be sufficient to generate the required amount.

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Real issue

Even those states that registered growth in tax revenue in the first quarter have asked the Centre for compensation for the first four months of the fiscal year

The Centre has so far released Rs 246 crore as compensation for the first quarter

Bihar got Rs 47.31 cr, Andhra Rs 193.80 cr and Tripura Rs 4.89 cr for April-June