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VAT: Ministry not keen to agree to TN request
November, 11th 2006

The Finance Ministry is not inclined to accede to the request of the Tamil Nadu Government that the State should receive 100 per cent compensation on the revenue loss from VAT implementation during the calendar year 2007.

Tamil Nadu is planning to implement State-level VAT from January 1, 2007. Official sources said that the State had suggested that the VAT compensation formula should be applied and counted from January 1, 2007 the date of its implementation.

"I don't think at this stage it is possible. As of now, there is no decision to change the compensation formula. The Centre has always taken the position that the revenue loss compensation for VAT implementation would be available for fiscal 2005-06, 2006-07 and 2007-08 at 100 per cent, 75 per cent and 50 per cent, respectively, of the revenue losses. It was never based on first year or second year or third year of implementation," sources said.

Earlier, a similar request from the States-ruled by the Bharatiya Janata Party was turned down by the Centre.

Indications are that Tamil Nadu would suffer revenue loss in its first year of VAT implementation, as its existing sales tax rates are somewhat on the higher side (higher than the 12.5 per cent rate in VAT system).

Meanwhile, Madhya Pradesh has made a revenue loss compensation claim of Rs 45 crore for April-August 2006.

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