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Compensation formula on a state-to-state basis — Accord reached on VAT package

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The Finance Minister, Mr P. Chidambaram, at the meeting of the Empowered Committee of Finance Ministers of States and UTs on VAT in the Capital on Tuesday. - Kamal Narang

New Delhi , Nov. 2

IN a major breakthrough towards ushering in a nation-wide value-added tax (VAT) system to replace the existing sales tax regime from April 1, 2005, the Finance Ministry has reached an agreement with State Governments over the compensation package to be availed by them to offset possible revenue losses during the initial transition period.

As per the formula, approved at a meeting that the Union Finance Minister, Mr P. Chidambaram, convened with his State counterparts here today, States would be entitled to 100 per cent revenue loss compensation in the first year of implementation (2005-06), followed by 75 per cent and 50 per cent in the second and third years, respectively.

The computation of revenue loss, in turn, would be worked out on the basis of the actual annual sales tax growth rates registered during the five years from 2000-01 to 2004-05. Of these five years, the average of the `best three years' will form the reference growth rate that would be employed for estimating the revenues that would have accrued to the States had the existing sales tax regime continued from 2005-06.

The compensation sums would then be arrived at, by subtracting the actual revenues flowing after the introduction of VAT from the projected revenues taking the reference growth rate.

While the Centre would bridge the entire shortfall during 2005-06, the extent of gap-filling will be limited to three-fourths and half in the ensuing two years.

Briefing presspersons, the Chairman of the Empowered Committee on VAT, Dr Asim Dasgupta, said that the compensation formula would be applied on a State-to-State basis. This would mean working out reference growth rates for each State, taking into account their actual annual sales tax growth during 2000-01 and 2004-05 and averaging out the `best of three years' individually.

Mr Chidambaram, on his part, held that the compensation outgo for the Centre "may be nothing", going by the experience in Haryana.

The latter, in fact, has recorded a higher revenue growth rate after moving over to the VAT regime from 2003-04 itself.

"In our assessment, we expect surplus revenues from States with the implementation of VAT. So, there may not be any requirement for compensation," he said.

Dr Dasgupta claimed that all States — barring Uttar Pradesh and a couple of North-eastern States (said to be Manipur and Nagaland) — had put in place their respective VAT legislations, for which the President's assent is likely to be obtained by end-December or early-January.

"Twenty-six States are now ready with their VAT bills, against 16 when our panel met on September 26," he said.

Regarding Uttar Pradesh, Dr Dasgupta said that he would, along with Mr Chidambaram, be visiting Lucknow on November 11 to confer with the Chief Minister, Mr Mulayam Singh Yadav, to sort out pending issues.

Uttar Pradesh's Agriculture Minister, Mr Ashok Bajpai, said that the State Government had no difference on VAT with the Centre, but it would agree on its adoption only after taking traders into confidence as promised in the elections.

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