The Hindu Business Line : VAT compensation package base year to be 2004-05

STATE Governments on Thursday scored a victory of sorts by convincing the Central Government to change the base year on which the compensation package for losses, if any, arising from implementation of value-added tax (VAT) is to be agreed upon.

A VAT regime that would replace the sales tax system in the country is scheduled to be implemented from April 1, 2005.

At a meeting of the Empowered Committee of State Finance Ministers on VAT, which was chaired by the Union Finance Minister, Mr P. Chidambaram, the States also demanded that the proposed compensation formula should be clearly spelt out by the Centre as early as possible so that they take an informed decision on the same.

Even as the nitty-gritty of the compensation formula is yet to be worked out, the Centre and the Empowered Committee of State Finance Ministers on VAT have agreed that the year 2004-05 would be considered as the base year in the compensation package.

"There are no differences between the Centre and the Empowered Committee on the issue of base year. We have broadly agreed that the growth rates should be applied on the base year of 2004-05 for the purpose of computation of losses, if any, arising from introduction of VAT," Mr Chidambaram told newspersons after the meeting that lasted for nearly four hours.

States have been pitching for a change in the base year from the earlier agreed fiscal 2001-02. They have been highlighting that sales tax collections have recorded robust growth rates in the fiscal years 2002-03 and 2003-04 and that to the extent possible the latest year before the implementation of VAT should be taken as the base year as this would be beneficial to them.

"Since VAT is expected to come into force from April 1, 2005, having 2004-05 as the base year is the best deal that can happen to the States," sources said. The other crucial factor that would determine the extent of compensation is the growth rate that has to be applied on the collections in the base year.

The Finance Ministry-appointed Expert Technical Committee is expected to suggest the growth rate that should be taken into account for arriving at the compensation package. The committee's report is likely to be submitted to the Finance Ministry in the first week of October. Dr Asim Dasgupta, Chairman of the Empowered Committee, termed the meeting as a "fruitful meeting". He held that the Centre continues to stand by the assurance that 100 per cent of the losses, if any, arising from implementation of VAT would be fully compensated by it in the first year.

"After the first year, there would be a review and if losses persist in the second year then 75 per cent of such losses would have to be compensated. In the third year, the percentage of compensation should be 50 per cent," Dr Dasgupta said.