The much-touted VAT, considered as the precursor to the proposed goods and services tax (GST), resulted in a loss of revenue for 10 states, and many manufacturers did not pass benefits arising out of low taxes to customers, the country's apex auditor the Comptroller and Auditor General of India (CAG) said today.

CAG said this while warning the government about some teething problems in the proposed GST.

CAG also pointed at the lack of preparedness for the common I-T system, which would enable the rollout of the GST.

In a study titled 'Implementation of VAT in India: Lessons for transition to GST', the CAG pulled up the Central government for not monitoring the progress made by respective state governments following the implemention of VAT.

It said that absence of monitoring led to manufacturers not passing the benefits of tax rate reduction to the common man.

"13 manufacturers did not reduce the maximum retail price of goods, despite a sharp decline in the rate of tax. Consequently, the benefit of Rs 40 crore was illegally retained by these maufacturers in the VAT chain instead of being passed on to consumers," the CAG said.

The study, covering 23 states, found that 10 states registered a dip in average revenue during the post-VAT regime, as compared to the pre-VAT period.

Recently, Finance Minister Pranab Mukherjee had expressed hope that GST would lead to higher revenue for states. In case of revenue loss, he assured full compensation to states.

Pointing that "loose ends across the VAT system have created a situation rife with opportunities for tax evasion in the states", the CAG said that one out of every two dealers had tried to evade tax.

"...As the departments detected 56,000 cases of evasion, out of 1 lakh dealers taken up for tax audits and additional demands totalling Rs 783 crore was raised," it said.

Pointing to the nascent I-T structure, CAG said, "We found that automation was in a nascent stage across all states, except Kerala."

The CAG said that if the VAT structure was implemented successfully, it could have led to a smooth GST regime.

"It was known that VAT will eventually lead to GST and a common software developed on a common platform across the states would be a precursor for this shift," the study said.

Recently, UIDAI Chairman Nandan Nilekani had made a presentation on I-T infrastructure before the empowered committee of state finance ministers on GST.

The government proposes to implement GST -- which will subsume excise, service tax and VAT -- from April 1, 2011. As per the Centre's proposal, goods will be taxed at 20 per cent and 12 per cent while 16 per cent tax will be levied on services.