The Centre has decided to give in to the states' demand for levying an entry tax on their transition to the value-added tax regime from April 1, 2003.
This will be over and above the 100 per cent compensation to be extended to states for losses incurred in the first year post-VAT.
Senior finance ministry officials told Business Standard, the states would be asked to ring fence the entry tax proposal outside the VAT legislations and levy the tax only after shifting to the new regime.
They said the dual benefits were being extended to ensure that the implementation of VAT was not postponed again.
Delhi, Madhya Pradesh, Maharashtra, Punjab, Karnataka, Uttar Pradesh and West Bengal are among the states that plan to levy the entry tax.
With the Centre giving in to their demands, these states could expect a windfall from the additional levy over and above the luxury tax, octroi, mandi tax, etc.
The finance ministry has been opposing the imposition of an entry tax because it defies the concept of free trade, which forms the basic premise for implementing a pan-India value-added tax.
The Kelkar task force on indirect taxes has also recommended the abolition of all other local taxes by states following the transition to VAT.
In fact, it has advised against any budgetary support to states for losses incurred due to the implementation of VAT.
The states had been lobbying hard for the continuation of the entry tax even after VAT. They were even willing to yield to the Centre's demand for removing the central sales tax at one go in return.
Earlier, consultant to the finance ministry, B R Atre, who scrutinised the VAT legislations of most states, had suggested the bifurcation of tax provisions from the VAT Bill.
"The provision for adjusting the entry tax payable by a dealer for goods brought into the local area in the state is not compatible with the concept of value-added tax, which is restricted to tax on the sale and purchase of goods, and has no place in the VAT legislation," Atre had pointed out.
He had recommended the bifurcation of the entry tax provision from VAT Bill in case of states like Delhi, Madhya Pradesh, Maharashtra, Punjab, Karnataka, Uttar Pradesh and West Bengal.
Kerala has already introduced an entry tax on a variety of goods, including electricals, fittings, edible and inedible oils, and petroleum products.
Assam has also levied an entry tax on items that do not carry a sales tax to stop the diversion of trade. Rajasthan has imposed an entry tax ranging from 1-4 per cent.