The Telegraph
Since 1st March, 1999
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Tax to compensate VAT loss

New Delhi, May 6: The BJP-led government pushed through an enabling Bill on service tax in the Lok Sabha today with the stated objective of helping states widen their tax base as they will lose out on revenue by introducing the value-added tax (VAT) regime.

“The proposed amendment will facilitate widening the tax base of states as and when they introduce VAT,” finance minister Jaswant Singh said while bringing in the Bill.

Although the Bill is one of the preconditions Singh had promised, it did not meet any opposition either from his party colleagues or others who had opposed VAT in Parliament.

However, BJP’s southern allies, AIADMK and TDP, opposed the move.

AIADMK demanded that the power to tax services should be exclusively preserved for states. V. Saroja said her party (AIADMK) felt that the measure came under the domain of the states and not of the Centre. This demand eventually forced a division on the entire issue.

TDP, on the other hand, made an even more embarrassing demand on the finance minister by saying that the service tax collected by the Centre should be distributed in the 3:5 formula between the Centre and the states whereby the former gets 3 per cent and the latter 5 per cent. The present distribution formula gives 5 per cent of the proceeds to the Centre and 3 per cent to the states.

However, Singh won the case today with 333 voting in favour and 10 against. A statement circulated by the minister during the course of the debate stated: “States have decided to introduce VAT in lieu of the existing sales-tax system (and) in order to widen their tax base, they have requested they be allowed to directly collect tax on services.”

The Bill will allow the government to levy the tax, placing it on the Union list and at the same time both the “Union and state governments can collect and appropriate proceeds of the tax”.

This means, though officially the government will levy service tax, it will farm out to the states the right to collect and retain tax on select services. Taxes on other services will be collected by the Centre and shared between the Centre and the states under the 5:3 scheme of distribution.

This is a compensatory measure offered by Singh to states implementing VAT despite last week officially ruling out bringing in country-wide VAT by June 1.

However, today’s enabling provision will be a shot in the arm for pro-VAT states.

Meanwhile, Singh had called off the meeting with the empowered committee on VAT that was scheduled for today.

The meeting between the finance minister and committee chairman Asim Dasgupta was cancelled because of the Rajya Sabha taking up the Finance Bill today, official sources said here.

Dasgupta, also West Bengal finance minister, was supposed to meet Singh before taking a final decision on the implementation of VAT from June as almost 16 states, covering over 75 per cent of the country’s trade and manufacturing, had agreed to switch-over to the new tax regime, replacing the sales tax.

The committee is likely to apprise the Centre of actions taken by it for VAT introduction as Singh had made it clear in Parliament that the implementation of VAT in a “patch-work” fashion could not be done and asked the states to complete the “groundwork”.

Official sources said that the “groundwork” has been done and the committee would press for the President’s assent to the VAT Bills of at least nine major states by May 25, so that they can go ahead with VAT by June.

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