All States to adopt VAT by next April

By Our Special Correspondent

NEW DELHI, JULY 5. With almost all the States agreeing to move over to the Value Added Tax (VAT) system from April 1, 2002, the Centre today promised to look into any possible revenue loss that they might incur and suggested that a compensation package be worked out. It also announced its intention of amending the Central Sales Tax Act, 1956, to facilitate this transition and said a new Indian Stamp Act had been drafted in response to the request from the States to change the out-dated Act of 1899.

The commitment from the States came today at a meeting of Chief Ministers on domestic tax reforms. Many States appealed for a compensation package to tide over the transitional revenue losses. The Union Finance Minister, Mr. Yashwant Sinha, presiding over the meeting, initially allayed their apprehensions by saying ``international experience on VAT, fortunately, is very encouraging. Practically none of the countries which have introduced VAT has lost revenue. This is because States will be able to enlarge the tax base through adoption of VAT and consequently they are bound to grow fiscally stronger.''

At the conclusion of the meeting, however, Mr. Sinha told presspersons that if there was any revenue loss, there could be a compensation package. A committee of State Finance Ministers and officials of the Finance Ministry would be set up for assessing the loss and working out the compensation formula.

This committee would also examine the introduction of VAT on services and imports, as proposed in the approach paper to the Tenth Five Year Plan, and submit its report by September.

The VAT envisages tax at every stage of production where some value is added to the raw material, but the producer gets credit for the tax already paid at the previous stage.

Hence, there is the apprehension of a revenue loss as the VAT avoids a cascading effect of taxation on the final product.

Earlier, Mr. Sinha informed the Chief Ministers and their representatives that the changes suggested by the Empowered Committee of State Finance Ministers had been incorporated in the amended legislation on Central Sales Tax Act which would be brought before Parliament during the coming monsoon session.

Preparatory work had already been done to move over to VAT such as placing uniform floor rates of sales tax in almost the entire country; impetus given for discontinuance and scale back of sales tax-based incentives to industries; preparation of harmonisation, classification and coding of commodities by the Centre for Taxation Studies, Kerala, and training of officials to handle the new system.

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