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Bill to broker VAT peace

New Delhi, May 5: Finance minister Jaswant Singh will introduce a Bill tomorrow that will place services on the concurrent list and give the states power to tax them — something he had promised the states he would allow as part of the compensation package to bring in VAT.

This is part of a strategy that Singh has evolved to be true to his promise of helping states introduce VAT even as he, under pressure from party colleagues, officially voices disapproval of the measure.

Last week, Singh had officially ruled out bringing in country-wide VAT by June 1. “Jab tak VAT ki puri tayyari nahin hoti tab tak VAT lagoon nahin hoga (till all arrangements for VAT are readied we will not bring in VAT),” he told the Lok Sabha.

However, it is learnt he has a tacit understanding with both the Congress and the Left, besides individual state governments, on this issue with approval from his boss, Prime Minister Atal Bihari Vajpayee.

To help states out, Singh has already decided that he will continue charging central sales tax (CST) in full at 4 per cent instead of the reduced CST of 2 per cent.

This helps states as 75 per cent of the money collected from CST goes to them and implies that they can, with this unexpected bonanza, do without the financial compensation which Singh had promised to them for bringing in VAT.

The Service Tax Bill by itself is innocuous and merely speaks of inserting a new article 268A in the constitution which says “taxes on services shall be levied by the Government of India and such tax shall be collected and appropriated by (both) the Government of India and states...” Top finance ministry officials said, “This will help states widen their tax base.”

Service tax will be a central tax but its collection and appropriation will be done by both the Centre and states, sources said.

Singh has been under intense pressure over the last two months from party leaders worried about the impact VAT would have on BJP’s poll prospects in north Indian states where traders, who are traditionally BJP loyalists, have been agitating against the measure.

But the dilemma for Singh is that VAT is the cornerstone of his new excise collection set up. If VAT is brought in, it will mean higher excise collections too as many manufacturers who were avoiding excise will now have to declare output. Under-invoicing and other tricks will be easier to detect. And this is why he is willing to do a double take on VAT.

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