The Telegraph
Since 1st March, 1999
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Ad blitz to quell VAT mutiny
- Government works on information campaign to win over sceptics

New Delhi, March 30: A high-level meeting at North Block, presided over by finance minister Jaswant Singh last week, decided to launch a political and information blitzkrieg to blunt resistance from states and traders to the new value-added tax (VAT) that the Centre is anxious states adopt from April 1.

A costly ad campaign has already been launched and will be followed up by yet others. Top pro-VAT ministers like finance minister Jaswant Singh and Bengal finance minister Asim Dasgupta will use their political skills to bring round recalcitrant states and trade bodies.

But like the US “wave of steel” in Iraq, it is making slow progress. Delhi, Punjab, Himachal Pradesh and Uttarkhand besides Tamil Nadu are still among the doubting Thomases.

The economics

With VAT, which brings in a nation-wide uniformity in local taxes, economics will now determine future business locations. Firms will be set up either near sources of raw material, cheap labour or markets and not on the basis of tax incentives.

This could spell good times for the east’s ‘rust zone’ or the iron and coal belt, where mineral resources and cheap labour is in abundance. It also spells good news for the west where major consumer markets exist. The biggest losers will be small states like Pondicherry, Dadra and Nagar Haveli which were attracting industry merely by offering tax incentives.

The new set-up allows manufacturers and distributors to claim tax credit for taxes paid anywhere in the country on any of the raw materials or finished products finally assembled and sold by them.

Some glitches

Traders, unhappy of having lost the chance of making money on sales tax they always charged customers but never paid to the taxman, are up in arms and anxious their date with honesty is set back.

Not that there are no other glitches on the road to VAT. State administrations are not yet ready with VAT rules and officials yet don’t know how to go about handling VAT.

Recalcitrant states like Delhi will be left out of the loop for the time being and allowed to join in later. “But we feel they will be the losers as business will by-pass them if they delay in bringing in their legislation or ordinance,” finance ministry officials said.

The meeting also decided that the government should finalise harmonisation of VAT taxes between the Centre and the state within a short spell so that teething troubles can be kept at a minimum.

States that were apprehensive of revenue losses from VAT have decided to take the risk as the Centre announced that it would cover all shortfall in their revenues on account of the switchover in this year. Besides, 75 per cent compensation would be given for 2004-05 and 50 per cent for 2005-06.

Finance ministry sources said some states are, however, still pleading that instead of partial revenue compensation for fiscal 2004-06, the government should undertake a ‘time-to-time’ review for ‘the amount needed to be compensated’. They want this money to be forked out on a monthly basis and not at the end of the year. Delhi has been spearheading the move which tantamounts to 100 per cent compensation for the three years.

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