For the first time staring at a shortfall in value added tax (VAT) collection, the state finance department is exploring the option of charging higher VAT on expensive mobile phones and fountain pens. The idea was floated once before but was shot down by the cabinet. This is now being actively considered for the budget.

According to the initial proposal, pens priced above Rs 5,000 and mobile phones costing more than Rs 10,000 may come with a 12.5% VAT tag rather than the present 4%. Explained a senior finance department official:

Approximately 96% of all mobiles are priced less than Rs 6,000. Hence anyone who is buying a phone worth Rs 10,000 or more obviously has the ability to pay a higher VAT. Same applies for fountain pens. Somebody buying such an expensive pen might as well pay a higher tax.

The finance department had set a target of Rs 10,000 crore for VAT collections during 2009-10. Trends so far suggest that there may be a 10% shortfall this time even though for the coming year there is already talk of a Rs 12,000 crore target.

For that to be achieved, we will need to adjust some of the rates. While the shortfall this year is because of recession, the more than 20% hike that we are looking at is slightly more than the natural increase by 15% which happens every year. Hence the reconsideration at VAT rates, the official explained. The differential tax rates on luxury items just two are under consideration at present will bring Rs 30 crore to the exchequer annually.

There is also a plan to do away with the VAT subsidy on 40 items including diesel and CNG which the department hopes will contribute to next years VAT collections.

Withdrawing the subsidy will also mean that the Rs 1,600 crore that we lose from the compensation package the Centre offers to states for levying VAT at the prescribed rates will start coming to us. That money will come in handy, the official added.