Prices of sugar and garments are set to go up with the empowered group of state finance ministers on Friday deciding to levy Value Added Tax (VAT) on these items from April 1, 2012. The levy will, however,not be applicable on handloom and khadi.

"There is a consensus among states to implement VAT on these items from April 1, 2012," empowered group chairman and Bihar FM and deputy CM Sushil Modi said.

Modi, however, said this will not add any further inflationary pressure on the two items and was meant to compensate for the duty loss that had occurred after the Centre gave up levying additional excise duty on these items. So far, VAT on these items was levied only in Andhra Pradesh and Delhi. While Delhi levied VAT on textiles, Andhra Pradesh imposed it on both sugar and textiles. Now, with the states deciding to levy VAT on them, the rates could vary anywhere between 4% and 5%.

"Since 1957, the Centre was levying additional excise duty and the revenue was shared with the states as per the devolution plan," Modi said. Last year, after the 13th Finance Commission asked the Centre to stop this tax, the additional duty was done away with but the loss to the states was not compensated , he added. The Centre's gain from additional duty on textiles was Rs 2,200 crore in 2005-06 and while that on the sugar it was Rs 1,220 crore.

The decision comes when the empowered committee met here to discuss pending issues on Goods and Services Tax (GST). This also indicated the states' increasing discontent with the Centre on the issue of compensation on loss due to phasing out of the Central Sales Tax (CST). Modi said states are upset that the Centre has not yet arrived at any formula on how to compensate the states on CST loss. The states are demanding full compensation. While the Centreallocated Rs 14,000 crore for 2010-11 , Rs 12,000 crore provision has been made for 2011-12 . The CST, a tax on inter-state movement of goods, was reduced from 4% to 3% in 2007-08 and further to 2% in 2008-09 after the introduction of VAT.
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