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Thursday, Jun 17, 2004

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VAT compensation kitty for States may be tightened

Anil Sasi
K.R. Srivats

New Delhi , June 16

THE Finance Minister, Mr P. Chidambaram, is likely to drive a hard bargain with States on the issue of compensating them for any possible revenue loss arising from their transition to the proposed value added tax (VAT) regime.

The Centre is, instead, likely to project Haryana as a case study. Haryana, the only State that shifted to the VAT regime, has reported an impressive 20 per cent increase in VAT collections during the last fiscal.

According to Government officials involved in the exercise, the above-average growth in Haryana's tax collections could prompt the Centre to tighten its purse on the compensation kitty for States proposing to shift to the VAT regime. The Centre, which had taken a tough stance against the States' claims about `notional' revenue losses arising from the transition, is likely to make a case for other States to emulate Haryana, officials said.

According to sources, neighbouring Punjab is also planning to shift to VAT in the near future, with or without the cushion of compensation extended by the Centre.

The thorny issue of compensation to States, which had, to a large extent, derailed the transition last year, is expected to resurface at the first meeting of the Empowered Committee of State Finance Ministers on Friday. The Committee is likely to set a new deadline of April 1, 2005, for a nationwide transition, officials said.

According to Haryana's Excise and Taxation Commissioner, Mr S.N. Roy, much of the buoyancy recorded in the tax collections during 2003-04 can be attributed to increased compliance and the inclusion of trading sector in the tax net following the shift to VAT. The sharp jump in the state's tax collection is even more impressive since it did not make any changes to the prevailing tax rates when it shifted from the sales tax to the VAT regime last year.

Prior to the changeover to VAT, the State had been reporting an average annual increase in tax collection of around 12 per cent, officials said.

In fact, during the first two months of the current fiscal, Haryana has reported a whopping 38.39 per cent jump in VAT collection, officials said.

Following intense pressure from States, the Centre had agreed to a graded compensation scheme for taking care of `notional losses' suffered by them on account of the change. As per the package, the Centre agreed to provide full compensation to States losing any revenue in the first year, 75 per cent in the second year and 50 per cent in the third year.

The Centre had also made a budgetary allocation under the VAT compensation head last fiscal. Most States, however, persisted with their demand for full compensation during all the three years following the transition, resulting in the deadline of April 1, 2003 being aborted.

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