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CST phase-out losses: VAT panel indicates terms of compensation

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(From left) The Finance Minister of Punjab, Mr Surender Singla, the Rajasthan Finance Minister, Mr Vrindera Mina, and the Finance Minister of Delhi, Dr A.K. Walia, at a meeting on VAT in the Capital on Monday. — Ramesh Sharma

New Delhi , Dec 5

THE VAT Panel overseeing the implementation of State-level VAT today announced the contours of the compensation package that it plans to demand from the Centre for revenue losses that would arise from the proposed cut in Central Sales Tax (CST) rate next year.

State Finance Ministers have already in principle agreed to a reduction in CST ceiling rate from four per cent to two per cent beginning April 1 next year. Annual CST collections during 2004-05 stood at about Rs 15,000 crore.

As part of the package, the VAT panel is now expecting a "combination of steps" from the Central Government for compensating the losses from CST rate cut next year and its possible elimination in the subsequent period.

Elaborating on the conceptual view that the VAT Panel plans to put forth before the Central Government, Dr Asim Dasgupta, Chairman of the Panel, told newspersons that a part of the compensation has to come from the Union Budget, to begin with.

This, he said, has to be combined with adequate devolution of financial resources obtained by the Centre through service tax, power to the States to tax certain services, power to the States for imposing VAT on sugar, tobacco and textiles (additional excise duty items), and also the devolution of entire revenues arising from VAT on imports.

Asked whether it would be possible for the States to derive power to tax services without a Constitutional amendment, Dr Dasgupta said, "Let us see what could be done within the existing framework."

Indications are that the VAT Panel may, in mid-December, have a round of consultations with the Union Finance Minister, Mr P. Chidambaram, on the issue of CST compensation package.

As regards VAT on imports, Dr Dasgupta said that the white paper on VAT had mentioned the need for VAT on imports and this has also been communicated to the Central Government. "Some of the States had differences among themselves on the issue of VAT on imports, but this has been sorted out."

Official sources, however, indicated that any move to impose VAT on imports might require Constitutional amendment as the States are looking forward to garner the entire revenues from VAT on imports.

"This may not be possible through the existing tax devolution system (as recommended by the Finance Commission), where only a portion of the overall Central pool of taxes are devolved to the States," the sources said.

Also, the States cannot directly levy VAT on imports, as the Constitution does not allow it. All powers of taxation on imports are vested with the Central Government.

Meanwhile, Dr Dasgupta said, the VAT Panel plans to write to the Chief Ministers of all such States where there have been deviations in the uniform floor rates (UFRs) agreed under the aegis of the Empowered Committee.

"Of the 29 States, the major deviations with respect to UFR violations are centred around 4-5 States. We will write to the Chief Ministers and request them to correct the deviations beginning January 1, 2006."

On the issue of non-VAT implementing States, Dr Dasgupta said that the Chief Ministers of all BJP-ruled States that are yet to implement VAT are likely to meet in the next 10 days.

Related Stories:
Roadmap for CST phase-out may be discussed at VAT panel meet
`Total CST phase-out linked to sound tax info exchange system'
VAT — on slippery track still
VAT will be, will be

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