The Hindu Business Line : Making the right noises

THE Finance Minister has reiterated the full support of the Central Government for the implementation of VAT from April 1, 2005, and the commitment to compensate the States as per the agreed formula, in the event of a revenue loss.

The agreed formula is: a) The Central Government would provide 100 per cent compensation to the States in 2005-06,75 per cent in 2006-07 and 50 per cent during 2007-08 for loss, if any, on account of introduction of VAT. States will implement VAT and put in place adequate supervisory systems to ensure its successful implementation. The Empowered Committee would continue to advise and guide the States in implementing VAT w.e.f. April 1, 2005.

b) Starting with 2004-05 and working backwards, States would be allowed to choose three of their best years out of the preceding five years for calculating the average rate of growth.

A positive and bold initiative is the setting of the medium- to long-term goal that the entire production and distribution chain should be covered by a national VAT, or even better, a goods and services tax (GST), encompassing both the Centre and the States.

Though this requires political will and Constitutional amendments, the setting of the goal is a positive move. Under the Constitution, the States have specific duties and obligation and, therefore, the framers of the Constitution had rightly vested the States with powers to raise necessary resources, one of which is the power to levy tax on purchase and sale of goods. While divesting the States of the power to levy sales tax, the Centre must ensure that they get their rightful share of the revenue.

The Centre should just not stop with goal setting, but should follow it up with the setting up of the mechanism for initiating dialogue with the States for a comprehensive GST to become a reality.

Trade and industry must carry forward this initiative, convincing States of the desirability of a single legislation encompassing Central Excise, sales tax (VAT) and service tax.

As regards the implementation of VAT from April 1, 2005, the Finance Minister has done what is possible, by reiterating the Central Government's support.

The commitment of the Central Government is more explicit with a provision of Rs 5,000 crore for compensation of revenue loss to States as against only Rs 700 crore provided by Mr Jaswant Singh in 2003-04 Budget.

It is now the turn of the States to firmly reiterate their commitment to implement VAT from April 1.

(The author is a Madurai-based chartered accountant.)

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