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Higher VAT rate to offset shrinking CST
May, 31st 2008

LPG and other declared goods, edible oils, bread, ready-made garments and intermediate goods may face 5% value added tax (VAT) from April 1, 2008. At present, VAT is levied at 4% on these items.

The Centre wants states to increase the floor rate of VAT from 4% to 5%, which will offset any revenue loss they incur due to reduction in central sales tax (CST) from 3% to 2%. Phased reduction of CST was agreed on in 2006. The state governments, on their part, have asked the Centre to bring imports under VAT.

As part of the CST phase-out plan, the state governments had agreed to hike the floor rate by 1%. This hike was to be implemented when the CST is cut to 2%. According to the roadmap, in the first stage, CST was to come down to 3% from 4% from April 1, 2007. The levy is to be brought down to 2% from April 2008 and 1% in 2009, before being abolished on March 31, 2010.

The state governments, which are resisting the move to hike the VAT rate, will take a final call on the issue in a couple of days and inform the Centre. The Centre, however, wants states to implement what was agreed upon as part of the phasing out.

There were some problems relating to some items. They are being worked out amicably between us and the Centre, Asim Dasgupta, chairman, empowered committee of state finance ministers, said. The members of the panel on Monday met finance minister P Chidambaram to discuss the modalities. They will now respond to the Centres suggestions by the weekend.

The compensation package for phasing out CST, which began from April 1, 2007, included transfer of power to levy service tax on some services, removal of additional excise duty on tobacco products, VAT on imports, budgetary support and hike in floor rate of VAT. The total collection from CST is pegged at about Rs 25,000 crore. With the reduction in CST rate from 3% to 2%, states will lose about 12,000-13,000 crore in revenue.

The Centre has removed additional excise duty from tobacco, provided for budgetary support and has begun transfer of revenues from 33 old services to states. However, it is yet to bring the 44 new services under the tax net. Moreover, of these 44 new services, states have agreed to bring healthcare, education, amusement parks and legal drafting under tax net.

It is likely that these services will be brought under the tax net this Budget. However, since the revenue loss due to 2% reduction will be quite high, state governments want the Centre to compensate them in full.

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