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States decide to keep VAT floor rate at 4% for now
May, 31st 2008

 Consumers can heave a sigh of relief for now. Standing firm against pressure from the Centre, state governments have decided not to raise the floor rate of Value Added Tax (VAT) from 4% to 5% in the current fiscal. Medicines and medical equipments, coffee, biscuits, fertiliser, sweets, footwear, IT products, tractor tyres, industrial inputs and capital goods at present attract the floor rate.

The Centre and state governments have agreed to carry out a constitutional amendment to facilitate levy of VAT on imports. Both sides will now meet on April 16 to rework the modalities of compensation formula for reduction of central sales tax (CST) from 3% to 2% expected from May 1.

We have reached a point of convergence. This is a very positive outcome of this meeting. We felt the methodology should be improved upon so the calculation has to be redone. There is no need to raise VAT rates, Asim Dasgupta, chairman of the empowered committee of state finance ministers, told reporters after meeting Union finance minister P Chidambaram.

The state governments have also not agreed for removal of additional excise duty from textiles and imposition of VAT immediately. They are willing to do so only from next fiscal after building consensus with the stakeholders, sources said.

Asked about the details of the reworked package, Mr Dasgupta said: This is a matter of detail that officials will now work out. The estimate of loss has to be carefully done. The states are expected to lose close to Rs 12,000-13,000 crore if the CST rate is brought down from 3% to 2%.

 There are very few differences and those that are there we should be able to resolve them on April 16, Bihar deputy chief minister and finance minister Shushil Kumar Modi said.

The compensation package for elimination of CST, which began from April 1, 2007, included VAT on imports, abolition of Form D, budgetary support and hike in floor rate of VAT from April 1, 2008, transfer of power to levy service tax on some services, removal of additional excise duty on tobacco products and textiles and abolition of Form D (the form that allowed government departments and enterprises to make concessional purchases).

As a part of the agreed package, the centre has already removed additional excise duty from tobacco, begun transfer of revenues from 33 existing services to states and abolished Form D. It also provided for budgetary compensation of Rs 2500 crore in budget 2007-08 for phase out of CST. However, it is yet to bring the 44 new services under tax net.

Most of the states which would be going for elections this year are opposed to hiking the floor rate of VAT from 4% to 5% and removal of additional excise duty on textiles.

They want the Centre to provide budgetary support instead. They have also asked the Centre not to include the revenues earned on account of abolition of Form D. Elimination of CST is inconsistent with VAT, which is a multi-point consumption tax on value-addition and important for roll out of unified goods and service tax regime from 2010.

Mr Dasgupta said the empowered committee had finalised the model and roadmap for the GST which would be given to the Centre this month. He said VAT collections gew 27% in the last fiscal.

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