New Delhi, Jan. 20: The government will soon start the process of phasing out Central sales tax with the introduction of value added tax (VAT) which will be levied at dual rates of 10 per cent and 12.5 per cent for general goods, a senior government official said here today.
He said the 10 per cent rate will be applicable for the northern states; it will be 12.5 per cent in the southern states. “This is because the southern states traditionally levied sales tax at a higher rate.”
The states have agreed to implement VAT from April 1 this year after the Centre promised to compensate revenue loss of the states on the introduction of it. The compensation package is — full revenue compensation for the year 2003-04 and 75 per cent and 50 per cent compensation for the following two years.
“The rationale for two VAT rates is that the states with a lower sales tax rate would be able to raise their tax to 10 per cent while those levying higher 17-18 per cent tax now would have to lower it to 12.5 per cent,” the official told newspersons here today. “Ultimately, the VAT rates would be merged into a uniform rate.”
Defence-related equipment have been exempted from VAT, the official said. However, there will be a VAT rate at 1 per cent for precious metals, 4 per cent for essential agricultural items and 20 per cent for alcohol and tobacco, the official added.
Additional secretary Anupam Dasgupta said: “There will be a phase-out schedule in three years as it disturbs the basic design of VAT and has a cascading effect. The VAT mechanism, along with the compensation package for the states, will be worked out in consultation with the empowered committee of state finance ministers.”
“Globally it is seen that the effect of VAT has been to soften the prices, barring odd exceptions here and there,” Dasgupta said, adding that the VAT committee will monitor the progress after the new tax regime is introduced.
The government will also introduce a new article — Article 268 A — so that “states and Union territories will be able to collect and appropriate service tax,” Dasgupta said.
“The draft legislation will be circulated to the states for their suggestions before it is introduced in the budget session of Parliament,” he said, adding Article 268A will have a list which will be exempted from taxation.