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States meet halfway on VAT, decide on June launch

New Delhi, April 8: Finance ministers of 16 key states today decided to bring in VAT, the controversial new tax which replaces state sales tax, from June 1 this year at a stormy three and a half hour meeting held today.

The sixteen which include all the eastern, southern and the two biggest western states — Maharashtra and Gujarat — account for 75 per cent of the country's output and 80 per cent of the market.

States which agreed to implement VAT from June are Maharashtra, Gujarat, West Bengal, Madhya Pradesh, Karnataka, Andhra Pradesh, Tamil Nadu, Kerala, Haryana, Assam, Orissa, Bihar, Jharkhand, Tripura, Goa and Meghalaya. Union territories Pondicherry and Daman & Diu decided to go ahead with the new tax regime from June.

However, Delhi, Rajasthan and Chattisgarh, which are going to the polls later this year, have decided to delay VAT till assembly elections are over. While Jammu and Kashmir promised to join in two more months after its officials had been VAT trained. VAT was to be introduced from April 1 but the deadline was missed as several states found they were still not ready.

Representatives from the Delhi government were adamant at today's meeting that VAT would hit it badly politically if it capitulated to the other states' demand on a deadline of June 1. Its neighbours — Punjab and Uttar Pradesh — immediately followed Delhi's lead and told the conference that they would introduce VAT only after Delhi had brought it in, otherwise they would end up losing revenue.

West Bengal finance minister and chairman of the empowered committee of state finance ministers Asim Dasgupta said after the meeting, “We will try to bring UP in. I will be flying down to Lucknow to talk things over.”

Dasgupta also grimly warned: “Once 16 states who represent overwhelming majority of producing states bring in VAT, non-VAT states will be the big losers. I can't see any manufacturer setting up factories or retaining factories in a state which does not give inter and intra-state tax setoffs for his raw materials which VAT gives. It would just be uneconomic for him.”

The new tax allows manufacturers and distributors to claim tax credit for taxes paid anywhere in the country on any of the raw materials or finished products assembled and sold by them. Industry chambers who see this as a way of reducing transaction costs, have long been lobbying for this.

Traders, however, are unhappy of having lost the chance of making money on sales tax they always charged customers but never paid to the taxman and are up in arms against this move.

BJP's north Indian units who depend largely on trader support, are unhappy with the tax and leaders like Vijay Kumar Malhotra and Madan Lal Khurana today met Jaswant Singh to lobby against the tax.

Singh said he will not back off from VAT and advised them to sell the message to their constituents that the BJP-led government was an ‘innocent’ bystander in the entire issue as this was really a state issue and states alone took all decisions on bringing in or delaying VAT.

Sources said Khurana and Malhotra, who did not totally agree with Singh, have been forced to accept this as the Prime Minister is backing Singh.

Dasgupta, who met Singh separately today, said the Centre and states had both decided to launch publicity campaigns this month to win over more supporter. “We will highlight that the new tax will actually make 78 per cent of the products cheaper. This tax will help consumers as it is more transparent and will not touch small traders who earn less than Rs 5 lakh. Middle-level traders who earn between Rs 5 lakh and Rs 25 lakh have to pay a 1 per cent turnover tax and only those who have a turnover of more than Rs 25 lakh will be covered by VAT, he said.

Dasgupta said another meeting of state finance ministers has been called on April 23. This will also decide on how states will tax three goods — sugar, textiles and tobacco — which the centre taxes now but has promised to transfer to the state list.

Meanwhile, in Calcutta, CII chairman (eastern region) Dipankar Chatterjee welcomed the government's decision to implement VAT from June 1.

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