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Low VAT hurt states: Finmin
July, 29th 2010

Analysis comes amid demands to fix higher Goods and Services Tax rates.

Even as states are worried they may not be able to increase rates after the introduction of the Goods and Services Tax (GST), an analysis by the finance ministry has found that most states levied Value Added Tax (VAT) at a rate lower than that prescribed by the empowered committee of state finance ministers. This resulted in substantial revenue loss, for which no compensation was paid by the Centre.

As many as 12 major states are estimated to have suffered revenue losses of Rs 4,329 crore in 2007-08. The losses are projected at Rs 6,589 crore in 2009-10 and Rs 7,761 in 2010-11. Maximum deviation was seen on foodgrains and tea, where the empowered group had prescribed a rate of 4 per cent and 12.5 per cent, respectively. Most states reduced the tax on foodgrains to nil and on tea to 4 per cent.

We noticed that most of the divergence is on the lower side. Lowering taxes helps states to attract the trade and the industry. None of them is levying any tax on foodgrains, while the rate approved by the empowered committee is 4 per cent. States fear that with the introduction of GST, they will lose autonomy to reduce or increase rates as and when required, said a government official who did not wish to be identified.

The Centre had promised the states to compensate them for losses which occur while shifting to the value added tax (VAT) regime. However, losses occurring due to levy of tax below the prescribed rates are not compensated by the Centre. The Union government compensates the states only when there is a revenue loss on the VAT rates prescribed by the empowered committee.

While states reduced rates on some items, they also increased the rates on camera, IT products and goods of importance for their respective states, said Pratik Jain, executive director, KPMG.

The loss of revenue in 2007-08 was the highest in Delhi (Rs 1,012 crore). While the prescribed VAT rate on natural gas and plastic scrap was 12.5 per cent, the Delhi government completely abolished the duty on these items. The state is estimated to lose Rs 1,694 crore in 2009-10 and Rs 1,791 crore in 2010-11.

Maharashtra lost Rs 933 crore, mainly on account of a reduction in the rate of transformers, semi-processed fruit and meat, while Tamil Nadu lost Rs 714 crore due to duty cut on edible oil and bakery products. The loss in revenue on account of lower-side deviation was also seen in Assam (Rs 68 crore), Chhattisgarh (Rs 202 crore), Haryana (144 crore), Jharkhand (Rs 156 crore), Karnataka (259 crore), Kerala (Rs 241 crore), Madhya Pradesh (Rs 403 crore), Orissa (Rs 30 crore) and West Bengal (Rs 162 crore).

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