States defer Vat on AED items to 2007-08

New Delhi, March 22 | Updated: Mar 23 2006, 06:11am hrs
State governments have decided to defer imposition of value added tax (Vat) on textiles, sugar and tobacco the items under the additional excise duty (AED) by one year. Vat would apply on these items effective from 2007-08, instead of April 1, 2006, as proposed earlier.

The decision was taken at a meeting of the empowered committee of state finance ministers with finance minister P Chidambaram here on Wednesday.

According to official sources, the Centre and states have also resolved to set up a technical committee to script a plan for phasing out the central sales tax (CST), a 4% levy on inter-state transactions, incompatible with the Vat system. The committee would also prescribe the formula for compensating the states for the CST phaseout. The reduction in CST would start from next fiscal, but not from April 1, 2006.

Most probably, the tax would be cut to 3% in the first instance. The sources said that the technical committee would come out with its report in April and thereafter, the plan could be implemented from May. The CST Act will have to be amended for this purpose, and this could be done by introducing a Bill in Parliament or through an ordinance, the sources added.

CST proceeds in 2005-06 are expected to be around Rs 18,000 crore.

Apart from cash compensation out of the central Budget, the ideas being considered for the CST-related compensation for states include allowing states to tax a number of services of local nature, shunting out a host of items from the declared goods status (to enable states to levy Vat at more than 4%) and finetuning of some Vat rates, the sources said.

The states have already made a tentative list of 100 odd services of local nature which they want to tax. The list includes some services currently taxed by the Centre, and a host of services not being taxed.Currently, the states have no power to tax services.