The Hindu Business Line : TN seeks `full compensation' to move to VAT

THE Tamil Nadu Finance Minister, Mr C. Ponnaiyan, on Friday laid down some conditions, including full compensation for the loss in revenue, for the State to switch over to a value added tax (VAT).

The Centre will have to devolve more funds to State governments and agree to fully compensate them for the loss in revenue from shifting over to VAT if it expects States to implement it, Mr Ponnaiyan said in an intervention during the debate on the budget.

Presenting the budget last week, Mr Ponnaiyan had asked members to put forth their views on VAT to enable the Government to reach a consensus before it enacted a legislation to facilitate the transition to the new tax system.

His intervention during the discussion in the Assembly came today when a member wanted to know the Government's opinion on the issue.

The Minister said that Tamil Nadu would not object to shifting over to VAT if the Centre fully compensates the States for the loss in sales tax revenue and from abolition of Central Sales Tax, and if it also agreed to leave out of the tax net the items that are now exempted from tax.

According to Mr Ponnaiyan, the loss in commercial tax revenue is estimated at Rs 1,600 crore apart from an additional loss of Rs 1,500 crore when Central Sales Tax is phased out. But the Centre has agreed to fully compensate the State governments only during the first year and in the second and third year by 75 per cent and 50 per cent.

He said that shifting over to VAT could result in inflation in prices because many items, including foodgrains, which are outside the tax net would be taxed. The Centre had agreed to exempt foodgrains only after repeated representations from the State Government.

The Centre stands to gain more than the States from the switch to VAT, he said. If VAT were complied with strictly the State governments' revenue would be from the two slabs — four and 12.5 per cent — under which the commodities are taxed. But the Centre's revenue from increased income tax compliance is expected to grow by 30 per cent.

Tamil Nadu has been arguing for greater devolution of funds from the Centre. Tamil Nadu had pressed for devolution of 50 per cent to State governments from the divisible pool of Central taxes but the 12th Finance Commission has recommended 30.5 per cent only.

The Centre's revenue from Tamil Nadu alone was about Rs 27,000 crore but it shares only a fraction of this with the State. Since 1998, service tax has been taken on to the union list and States have been denied a significant share of the service tax revenues. A considerable portion of the service tax benefits should also devolve to State governments, he said.

Further, the Centre was considering hiking the exemption limit for small traders under the VAT net. This would represent more loss to the State governments, which should also be compensated, Mr Ponnaiyan said.

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