Chennai, Dec. 5: Left with no option after the threat by manufacturers to stop investing further in the state, Tamil Nadu today agreed to introduce value added tax (VAT) in place of the old sales tax regime. With Tamil Nadu deciding to implement VAT, there are now two states who are yet to implement the tax regime: Uttar Pradesh and Pondicherry.

A bill on replacing the Tamil Nadu General Sales Tax Act, 1959 with VAT from January 1 2007, was passed by the state assembly here today, amid protests and a walkout by the main opposition party, the AIADMK, which demanded the bill be introduced in a modified form.

The VAT regime, as agreed upon by the empowered committee of state finance ministers’ under the chairmanship of the West Bengal finance minister Asim Dasgupta, provided for three rates of tax on the sale or purchase of goods, at one per cent, four per cent and 12.50 per cent.

Tamilnadu commercial taxes minister S.N.M. Ubaiyadullah allayed fears of small traders getting hit by VAT.

Traders and dealers with an annual turnover of up to Rs 10 lakh have been exempted from VAT. This should take care of the interests of the small traders, the minister said.

Moreover, VAT was being accepted all over the country, and Tamil Nadu could not afford to remain isolated on this issue, the minister told the House, during the heated debate on the Bill.

VAT would retain the tax exemptions on many commonly used articles and even for traders/entrepreneurs with turnover above Rs 10 lakh and up to Rs 50 lakh per annum, a simple compounded rate of tax would be levied, Ubaiyadullah said. The new tax regime will thus be beneficial to all sections, he said.

On the Centre compensating the state for revenue loss due to the introduction of VAT, the minister said though Tamil Nadu had been pressing for 100 per cent compensation in its first year of VAT, as given to other states, the UPA government has said that “we will get only 75 per cent compensation” as the state had delayed the introduction of VAT by a year.

The 75 per cent norm is for states in the second year of VAT and hence Tamil Nadu would stand to loose Rs 375 crore on this count.

Like other states, Tamil Nadu would have got 100 per cent compensation if it had introduced VAT last year.

On Central sales tax that covers inter-state sales, Ubaiyadullah said this was an issue still being discussed by all the States with the Centre.