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Govt readies blueprint for VAT

New Delhi, June 16: The Congress-led government will introduce a nationwide value-added tax (VAT) this year, a roadmap for which will be laid out in the Union budget to be presented on July 8.

The BJP-led government had tried to introduce VAT last year but could not in the face of opposition from the north Indian trader lobby and fears that it would mean poll reverses in a few states.

The Centre also plans to bring in the Service Tax Bill and notifications to let states levy tax on a host of services. Services have already been put on the concurrent list for taxation through the 95th Constitutional Amendment Bill. But without the Service Tax Bill, states cannot levy taxes as yet.

The right to tax certain services are being given to states as a sop for the revenue loss some of them will face when they scrap sales tax and move over to a nationwide VAT regime.

Finance minister P. Chidambaram is expected to meet chief ministers and state finance ministers as well as leaders of various parties over the next few days to evolve a consensus on the introduction of VAT.

The VAT levy, which is likely to be introduced by the end of this fiscal, will be imposed on the value added at each stage of sale of a good instead of the normal single-point sales tax which it will replace. For instance, when a dealer makes a sale, he will be able to claim credit for the tax he has already paid for the musical horn, the seat covers, music system and extra tyre he bought and sold along with a car.

All businesses will be covered by VAT except micro businesses whose low income levels would make them untaxable. The government will stick to four broad tax slabs zero rate for food and life saving drugs, 1 per cent on gold and silver, 4 per cent on intermediate goods or normal inputs to manufacturing, and 10 per cent on most final goods and a prohibitive 20 per cent on spirits and petrogoods.

States currently charge sales tax in varying slabs ranging from 1 per cent to 4, 8, 12 and 20 per cent on a host of goods, without giving manufacturers the benefit of claiming refund for taxes paid in another state.

In abolishing them, many states feel they will lose out on revenue. The Centre will try to win them over by allowing them to tax financial services and commodities trading.

Services account for a 48.5 per cent of the total GDP and North Block officials argue that bringing services under state jurisdiction will mean more effective tax collection. Due to its nature and geographical dispersion, service taxes are more easily collected by states.

However, this does not mean the Centre will stop levying taxes on services it has selected. The list of services which the states will be allowed to tax will be completely different from the Centre's.

The finance ministry wants the state and central level service taxes to be eventually integrated with the VAT on goods so that a manufacturer can set off taxes paid for a service bought by him while paying taxes on his finished goods. The Cenvat will also be eventually dovetailed into this nationwide taxation system, thus reducing the overall tax burden on consumers.

Last year, the BJP-led government had tried to bring in a nationwide VAT but intense lobbying by north Indian traders and a handful of states forced the government to junk the tax measure which is popular in the west and which most analysts feel increases competitiveness of Indian manufactures.

Several states, including Haryana and Punjab, have already introduced VAT, while about 11 other states had indicated their willingness to implement it last year. North Block hopes this year it will be able to convince most of the other states to join.

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