In a relief to secondary steel makers, Punjab government today announced to slash VAT rate from 4.95 per cent to 2.5 per cent on iron and steel items.

Punjab Deputy Chief Minister Sukhbir Singh Badal gave nod in this regard after holding a meeting with the delegation of furnace, iron and steel rolling mills here today.

The new proposed VAT regime on iron and steel industry is aimed to enable it to compete with neighbouring states and increase in revenue, an official release said.

As per decisions taken, the rate of VAT on scrap (melting and rolling), ingots/billets/blooms or other semi finished goods, finished goods, inter-state sales would be reduced to 2.5 per cent from 4.95 per cent with surcharge of 10 per cent.

To prevent a practice of bogus input tax credit claim, it was decided to restrict the claim to maximum two stages.

Introducing restructured VAT regime for this sector, the state government has also decided to calculate VAT on the basis of energy consumption by unit.

"After the implementation of new system, there should be a minimum commitment of production of 1 tonne of finished items with 250 units of consumption of electricity, whereas for furnace units, a minimum commitment of 1 tonne of ingot production with 750 units of electricity has been made," official said.

"This new system (of calculating VAT) will eliminate tax evasion and also lead to increase in production by encouraging flow of scrap and raw material into the state," release said.

The total tax collection from iron and steel industry was Rs 1,091 crore in the financial year 2012-13, out of which Rs 403 crore was refunded to tax payers, resulting in the net tax collection of Rs 688 crore.

Badal said initially new VAT regime will bring a revenue loss of Rs 185 crore to the state but in the coming years it will generate more revenue in a big way as industry would increase the production.

Badal has also announced that the Punjab Cabinet would approve the new VAT regime for iron and steel industry in its meeting to be held in first week of January.

The restructured VAT regime would be notified and implemented from February 1, 2014.