INTRODUCTION OF VAT BY STATES

PRESENT POSITION :

The implementation of VAT was postponed a number of times till 21 States implemented the system with effect from 1st April 2005. Earlier, VAT was to be implemented with effect from 1st of April 2002 only to be postponed to 1st of April 2003 and later 1st July 2003. As it missed the July deadline too, there was silence on VAT for 1 full year before the present Finance Minister Shri. P. Chidambaram announced the Centre’s will and intention to implement VAT from 1st April 2005. 

The delays were due to a number of unresolved issues arising out of VAT. The most important issue of course was the loss in revenue arising to the State Governments due to the rebating of input tax under VAT. This loss in revenue arising out of input credits naturally meant that State Governments had to work out suitable higher rates of taxes on various commodities, in a way that would ensure that this would neutralise any loss in revenue. This is called the Revenue Neutral Rate or RNR. The arrival of the RNR was a complex process and states had to not only maintain the RNR within a reasonable bandwidth, but also ensure that the RNR was really revenue neutral before acceding to a VAT regime.

The statement of the Finance Minister in the course of his Budget speech for 2004-05 and subsequent statements made by him in various fora made the introduction of VAT from 1.4.2005 virtually certain. The Central Government will be taking the following initiatives towards a successful transition to VAT:

• Central Government will compensate States and Union Territories for the loss apprehended on account of switching over to VAT based on an agreed formula as under:
  

	100%	2005-06
	75%	2006-07
	50%	2007-08

The loss will be computed with reference to the average revenue of 3 best years out of the previous five financial years. The difference between the actual revenue ( in the VAT regime) and the above average will constitute the loss to the State Governments to be compensated by the Centre.

• Central Sales Tax will eventually be abolished though a road map for the same has not been laid out. Members will recall that Shri. Jaswant Singh, former Union Finance Minister did indeed indicate in his Budget 2003-04 that CST will be brought down to 2% from a notified date in 2003-04 and eventually zeroed. The new road-map is yet to be unveiled.
  

• Suitable compensation to States arising out of the above will be provided for. Nearly Rs. 15,000 crores of CST revenue is accruing to the States from the Centre every year.
  

• Services will be brought into the tax net in a more comprehensive way to help boost revenue and it is likely that there will be a sharing of such revenues with the States
  

• Suitable amendments to the Additional Excise Duty Act will be brought in to enable States to tax Tobacco, Textiles and Sugar at a rate not exceeding 4% under the VAT regime, and thereby ensure integration of these items within VAT. However, no clear time-table has been set for this also.
  
  Thus major States have to contend with a substantial erosion in the revenue.