Date:12/03/2005 URL: http://www.thehindubusinessline.com/2005/03/12/stories/2005031201541700.htm

Back Decks cleared for shifting to value-added tax regime

Our Bureau

The Karnataka Deputy Chief Minister, Mr S.M. Siddaramaiah, presenting the Budget on Friday. — V. Sreenivasa Murthy

Bangalore , March 11

KARNATAKA has cleared the decks for moving into the value-added tax (VAT) regime beginning from April, making it the first State to do so.

Presenting the Budget for the fiscal year 2005-06, the Deputy Chief Minister, Mr S.M. Siddaramiah, who also holds the finance portfolio, said that the transition to VAT would result in a revenue loss of Rs 2,160 crore. The transition has been adopted with a low standard rate of 12.5 per cent.

VAT would apply to all commodities except petrol, diesel, aviation turbine fuel and sugarcane. In addition, Mr Siddaramaiah has exempted its application to commodities such as paddy, wheat, pulses and branded bread for a period of one year.

He has also kept molasses out of the purview of VAT. Instead, he has opted for levying an excise duty on rectified spirit made from molasses. Karnataka had also sought increased professional tax and a Sate-level service tax, which were not approved by the Centre.

Despite the revenue loss on account of VAT, the State Government has managed to present a revenue surplus of Rs 854 crore for the next fiscal year.

This was partly due to the 100 per cent compensation anticipated from the Centre in the first year of transition and reduced interest burden due to the recommendations of the 12th Finance Commission and the debt swaps.

The State expected gross revenues to increase to Rs 29,218.47 crore next fiscal, up from the revised estimates of Rs 25,320.34 crore in the current fiscal. Its own tax revenues were estimated to increase to Rs 18,680.16 crore up from Rs 15,747.85 crore. Non-tax revenues were estimated at Rs 4,090 crore up from Rs 3,768.32 crore.

The revenue surplus has been projected despite the large increase in revenue expenditure. Revenue expenditure was estimated to increase to Rs 28,364.01 crore for the next fiscal, up from the revised estimates of Rs 24,812.67 crore. The increased revenue expenditure was driven by Karnataka's decision to continue with power subsidies.

Subsidies to the power sector for the next fiscal are estimated at Rs 1,750 crore, the same level as last year.

Further the State Government has also decided to continue to provide waiver of farm loans. It has made a provision of Rs 450 crore for such loan waivers.

Despite the increased revenue expenditure, Mr Siddaramiah was optimistic about maintaining fiscal discipline. The fiscal deficit estimated for 2005-06 is Rs 4,714.46 crore or about 2.86 per cent of the State domestic product.

The only major component in capital expenditure is Rs 95 crore allocated for the proposed Bangalore International Airport.

Another Rs 109 crore has been provided for the proposed Bangalore Metro Rail project.

What was expected to help the Government's fiscal discipline was the debt rescheduling extended by the Union Budget.

As a result, the repayment burden on the Centre is estimated to drop to Rs 563.42 crore in 2005-06 from the revised estimates of Rs 1,156 crore for the current fiscal.