Govt likely to increase Vat by 1%

Written by Economy Bureau | New Delhi, Jan 28 | Updated: Jan 29 2008, 04:08am hrs
The government has proposed to hike the rate of value added tax (Vat) by 1%. The proposal is meant to create an additional level of compensation for states to offset the 1% cut in central sales tax from the next fiscal. This means the Centre wants states to increase the Vat rate form 4% to 5%.

The proposal, discussed by the empowered committee of state finance ministers in their meeting on Monday, however, did not find much favour with the states. The panel led by chairman Asim Dasgupta also met finance minister P Chidambaram to discuss alternate measures, sources said.

The panel also discussed substitute measures, including bringing more services currently being taxed by the Centre under the states' service tax net. These would include the originally proposed 44 services as well as minor services with the Centre such as hairdressing, sources said. Another alternative proposal is to levy a 4% Vat on imports as proposed by the panel earlier.

A final decision is likely to be taken soon by the panel and will be submitted to the Centre, sources said. States are expected to reduce CST from 3% to 2% from 2008-09 as part of the CST phase-out. However, they fear that the 2% cut will amount to revenue losses of about Rs 12,000 crore to Rs 13,000 crore and are seeking additional compensation from the Centre.

Meanwhile, the empowered committee on Monday also discussed the road map for the goods and services tax (GST). Briefing reporters after the meeting, Dasgupta said, "We have reached a convergent position that the rates of GST would be few... and there would be common rates between the Centre and states, encompassing both goods and services."

He said the panel would submit its recommendations to the finance minister by fiscal-end. The report would be made public at an "appropriate time", he said.