February 12, 2006	Sunday	Muharram 13, 1427

NEW DELHI, Feb 11: Sugar, textiles and tobacco may attract a 4 per cent value added tax (VAT) from the coming fiscal. Finance minister P Chidambaram is set to allow states to levy VAT on these three items - which are currently covered by additional excise duty (AED). The proceeds will enable states to offset part of the losses due to the phase-out of Central Sales Tax (CST).

CST will be lowered from 4 per cent to 2 per cent in the coming fiscal, even as AED is set to be scrapped on the three items. In fact, the suggestion asking states to consider levying VAT on AED items has come from the FM.

The estimated loss on account of a 2 per cent cut in CST is Rs9,000 crore. CST is levied by the Centre on inter-state transactions but the proceeds go to the states. A 4 per cent VAT on sugar, textiles and tobacco is expected to yield revenues of around Rs3,000 crore.

States reckon that the balance loss of Rs6,000 crore could be off-set if they are given a higher share — of 50 per cent — in service tax revenues. At a meeting with senior officials of the finance ministry on Monday, states made a case for giving them the powers to collect service tax from the telecom sector — which is a revenue spinner.

Mr Chidambaram had earlier made it clear that the selection of services to be taxed should remain with the Centre and that national and international services can be captured only by the Centre. Service tax revenues — which contributes to around 52 per cent of the GDP — have been buoyant this fiscal.

The minister had asked states to explore a combination of non-monetary options for CST compensation including VAT on imports, marginal adjustment in some CST rates, besides levying VAT on AED items.

Currently, the three AED items attract a 4 per cent additional excise duty in lieu of sales tax, besides central excise duty. AED will be scrapped, once states levy VAT on sugar, textiles and tobacco. Legislative changes to enable states to levy VAT on these items was made in ‘03. The Centre only has to notify this provision in the coming fiscal.

States have to be compensated for revenue losses on account of transition to VAT as well - which is estimated at around 1,000 crore in the coming fiscal.—By arrangement with The Times of India