Our Bureau

New Delhi, July 21

STATES are likely to impose value added tax (VAT) or sales tax on all textile items with effect from April 1, 2006, according to a top VAT panel official.

This follows a decision between the Centre and the States that the latter be allowed to impose VAT or sales tax on textile items.

At present, the Centre imposes additional excise duty (in lieu of sales tax) on textiles, tobacco and sugar. Under the existing agreement between the Centre and the States, items that are liable to AED would not attract sales tax.

"It has been agreed that from April 1, all textiles should be brought within the framework of VAT. States would be allowed to impose VAT or sales tax, but at a rate not exceeding four per cent," Mr Ramesh Chandra, Member Secretary of the Empowered Committee of State Finance Ministers on VAT, said at a national conference on VAT organised by the Confederation of All India Traders (CAIT) here on Thursday.

He also said that the necessary notifications for this purpose would have to come from the Union Government.

Informed sources said that the termination of existing tax rental arrangement and allowing States to levy VAT or sales tax on any of three AED items (sugar, textile and tobacco) would have a bearing on the share of the States in the divisible pool of central taxes.

The Twelfth Finance Commission had recommended in its report that the share of the States in the net proceeds of the shareable central taxes be raised from 29.5 per cent to 30.5 per cent.

The recommendations have already been accepted by the Union Government.

The commission had specifically said that AED (in lieu of sales tax) on sugar, textiles and tobacco should be treated as part of central taxes.

It had also stipulated that the share of the States in the net proceeds of the sharable central taxes would be 29.5 per cent, if the States are allowed to levy sales tax or VAT on these commodities without any prescribed limit.

The AED in lieu of sales tax constituted one per cent of the shareable taxes in 2003-04 and 2004-05 (BE).

Meanwhile, Dr Parthasarathi Shome, Advisor to the Finance Minister, has promised traders that he would urge the VAT authorities to arrive at a common denominator in respect of the VAT returns.

"I agree that the VAT returns of States are not homogenous," he said, attributing the differences to the varying degrees of computerisation in the tax departments of the States.

(This article was published in the Business Line print edition dated July 22, 2005)
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