Jas washes hands of VAT, but states won't budge

Finance minister Jaswant Singh on Wednesday dropped the political hot potato called value-added tax but the empowered committee of state finance ministers picked it up, quite determined to meet their deadline of June 1 for 16 states to implement VAT.
The ruling BJP has been hostile to VAT, considering it a major irritant for the crucial Assembly elections scheduled later this year in Delhi, Rajasthan and Madhya Pradesh. (The only major state with a BJP chief minister, Gujarat, plans to implement VAT on June 1. But the state does not face elections for another one and a half years.)
By washing his hands of VAT, Mr Jaswant Singh has met his party''s goal of distancing the BJP from implementation of VAT.
This disowning of political responsibility, hailed by various traders'' associations, is expected to hold even if the Centre plays a passive supporting role in implementation of VAT at the states'' initiative later on in the year.
Replying to the debate on the Finance Bill, Mr Singh reiterated that patchwork implementation of VAT is neither desirable nor feasible.
He insisted that it would be futile to implement VAT unless major states from all regions come on board and unless all state-level VAT legislation have uniform provisions.
Delhi, Punjab, Uttar Pradesh and Rajasthan are absent from the list of 16 states planning to commence VAT from June 1. Ergo, this insistence on regional balance, along with a new-found willingness to give time for doing the needed groundwork at the state level, spells withdrawal of Central support for the ongoing VAT effort of the states.
The reduction of CST to 2% is contingent on all states switching over to VAT, the minister said.
The empowered committee of state finance ministers said, on its part, that 16 states that have agreed on adoption of value-added tax would stick to the 1 June deadline for ushering in the new regime, anyhow. The committee will meet Jaswant Singh over this week and meet again on May 5.
After a two-day meeting here, chairman of the VAT panel and West Bengal finance minister Asim Dasgupta said: "We have worked out in detail the features of immediate concern that are to be shared by the 16 states switching over to VAT from 1 June."
The remaining issues would be sorted out during the committee''s next meeting slated for 5 May, he added. While there would no going back on VAT features that were agreed upon in today''s meeting, it is felt that there should be flexibility with regard to certain concerns expressed by states with "special characteristics." The required flexibility would be provided to these states, without disturbing the VAT structure, Mr Dasgupta said.
The empowered committee would meet Mr Jaswant Singh in the first week of May to make its positions clear on the compensation expected from the Centre in case of revenue losses to states due to VAT adoption.
Mr Dasgupta refused to comment on Mr Singh''s differences with the empowered committee on the "preparedness" of states to implement VAT from June 1.
It is understood that notwithstanding the Centre''s apparent lack of support to some of the committee''s recent proposals for lower VAT rates on items like drugs and medicines, the committee is likely to propose exemption from VAT to foodgrains, which currently is under 4% rate meant for essential goods.
States which are foodgrain deficient like Tamil Nadu which currently exempt foodgrain from sales tax or levy ST of 1-2% on the item had pitched for the exemption, informed sources told ET.
The panel would also re-define ‘capital goods'' in the context of VAT and would come out with a complete list of items to be put under
revenue-neutral rate of 12.5% soon. As regards drugs and medicines, there could only be one VAT rate, that is, 4%.
The proposal to exempt some special "life-saving drugs" from VAT might not work, sources said. However, states which would want to exempt a few drugs of their choice from VAT would be free to go ahead.