The Telegraph
Since 1st March, 1999
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VAT in north versus rest

New Delhi, April 24: Finance minister Jaswant Singh is under pressure from party colleagues to disassociate himself from value-added tax, which 16 state finance ministers have decided to introduce from June 1.

Worried that they will suffer in crucial Assembly polls because of the Centre’s tacit support for the tax measure, BJP leaders want the finance minister to state in Parliament that he favours a delay since none of the major northern states is willing to join.

“Their main contention is that allowing VAT to be introduced in this form would create a north-versus-rest of the country divide,” top finance ministry officials said.

All the eastern and southern states and the two biggest western states — Maharashtra and Gujarat — are going ahead with VAT. These 16 states account for 75 per cent of the country’s output and 80 per cent of its market.

However, Delhi, Rajasthan and Chhattisgarh have decided to delay introduction of VAT till after the Assembly elections later this year.

Punjab and Uttar Pradesh have decided they will bring in the new tax measure only after neighbouring Delhi does, as they would end up losing revenue otherwise.

The finance minister is under pressure from BJP leaders in Delhi and Rajasthan, including Vijay Kumar Malhotra and Madan Lal Khurana, as well as from party chief Venkaiah Naidu. But most crucially, from deputy Prime Minister L.K. Advani who made his point to Singh in an informal meeting last week. Advani and Naidu have argued the trader lobby is the BJP’s oldest and most loyal support base and it would be disastrous to alienate it through a sudden change in tax measures.

For Singh, accepting the party line would not only mean a loss of face but also reneging on a promise he has made to Asim Dasgupta, West Bengal finance minister and chairman of the empowered committee on VAT, to push through the measure.

Singh’s help is crucial as he is to pilot a Bill giving states the right to tax certain goods and services and to give shape to the nationwide VAT. He is also the man who holds the purse strings from which states are to get compensation for losses they are likely to suffer for introducing VAT.

Dasgupta has already given in to pressure from Singh, BJP chief ministers and his own party to reduce tax on medicines from 12.5 per cent to 4 per cent, tax life saving drugs at zero per cent and grant relief to traders with an annual turnover of up to Rs 40 lakh.

Dasgupta had at a meeting with other state finance ministers decided that to blunt the traders’ agitation, he would let traders who earned between Rs 5 lakh and Rs 40 lakh pay a nominal 1 per cent turnover tax. Earlier, this facility was open only to traders earning between Rs 5 lakh and Rs 25 lakh.

He had earlier also announced that those earning less than Rs 5 lakh would not come under the ambit of any tax at all.

“These are major concessions and were made mainly because Singh had requested Dasgupta to bring in norms which were more trader-friendly,” senior finance ministry officials said.

Singh’s aides are worried that going back totally on VAT would be the third “rollback” for the Union finance minister, after the failed attempts to increase urea prices and to bring the powerloom sector under the tax net.

Singh has always been conscious that he should not turn into a figure of ridicule like his predecessor Yashwant Sinha, who was dubbed Rollback Sinha by the media and his rivals.

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