ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Whither State VAT?

ECONOMIC AND POLITICAL WEEKLY Whither State VAT? The Empowered Committee (EC) of state finance ministers, constituted to steer the states towards a regime of harmonised value added tax (VAT), met once again at the end of last month and reiterated its resolve to usher in VAT on April 1, 2005. The meeting seems to have focused on securing a reassurance from the centre about the compensation for any revenue loss that the switchover may entail. Union finance minister P Chidambaram repeated the earlier promise of 100 per cent compensation in the first year, 75 per cent in the second and 50 per cent in the third extended by his predecessor. So states seem all set to take the plunge at last. But what kind of state VAT can the country expect from the next fiscal? The design of VAT that would be operating at the state level has been outlined more than once in meetings with the press by the EC chairman, Asim Dasgupta. There are, it appears, several features in the design that detract from the potential of VAT to serve as an efficient instrument of commodity taxation without encroaching on the fiscal autonomy of the states. Despite persistent criticism there is no word yet on whether any modification of the scheme is contemplated to take care of the glaring deficiencies. The deficiencies are primarily twofold: one inherent in the rates and the other stemming from the absence of a clear roadmap to indicate how interstate trade is to be treated. According to what has been aired so far, apart from a zero rate, there will be a three-rate structure: 4 per cent for 250-odd commodities (agro-products and industrial inputs), 12.5 per cent for 217 other items and 1 per cent for gold and precious metals. These are supposed to be

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