Confusion among members of an Empowered Committee of State Finance Minister on Goods and Services Tax has torpedoed state finance minister Raghavjis proposal to levy value-added tax (VAT) on sugar, cloth and power distribution system.

When the Bihar deputy chief minister and the chairman of the committee did not propose the VAT on these commodities, why should only Madhya Pradesh trigger public ire over the issue, a well-placed government source told Business Standard.

Stung over revenue losses due to the Union governments refusal to compensate the states over a slash on the Central Sales Tax from four per cent to two per cent, the committee had earlier decided to levy VAT on sugar, cloth and power distribution system across all states.
If one state skips and other levies VAT on these commodities, it would trigger intra-state sales, tax evasion and other unscrupulous business practices, besides protests by traders, the source added. In a state like Madhya Pradesh where the size of the Budget is ~80,000 crore, a revenue expectation of ~130 crore is negligible. Hence, the state decided to skip VAT on sugar and cloth.

The Budget session is already over in all states, but this rift between states through empowered committee has created a little dent in solidarity of those states that were opposing Goods and Service Tax.

Traders community and the main Opposition (Congress) took undue credit of abolishment of new proposals as they proposed a state-wide bandh and lobbied against the VAT proposals under the aegis of Federation of Madhya Pradesh Chambers of Commerce and Industry.

Since the Union government had removed additional excise duty on sugar and had refused to pay central sales tax compensation, the state finance minister had proposed a VAT at the rate of five per cent on power distribution system.

Also, a five per cent VAT has been proposed on sugar and cloth. The proposal of VAT on the power distribution system was actually targeted at attracting investment from power equipment manufacturers as the government had also made provisions of input tax rebate on power equipment.