"Yes, there would not be any increase in VAT rate now," Asim Dasgupta, chairman, Empowered Committee of State Finance Ministers on VAT said in response to a query whether the panel is ruling out a hike in the state tax rate.
There is no need to increase the VAT rate at all, he said, particularly when inflation is on an upswing.
The VAT panel members met Finance Minister P Chidambaram to reach an agreement over a package for states on account of losses due to a proposed cut in CST from three to two per cent for this fiscal. The intended cut, however, did not happen since there was no agreement on compensation.
"This was a very positive meeting. We wanted to reach a point of convergence relating to compensation for loss to the states on account of reduction of CST from three to two per cent. We have worked out the details and discussed with Finance Minister," he said.
Sources said the Union Finance Ministry has suggested to states to increase VAT rate from four to five per cent on intermediate goods this fiscal and to six per cent next fiscal to partly compensate for losses due to proposed cut in CST rates.
States, however, did not agree to this, particularly when "prices are rising", the sources said. The states suggested that the Centre should go for constitutional amendment to allow them to impose VAT on imports to partly meet the losses, the sources said, adding that the remaining losses should be met by the Budgetary support.
However, Dasgupta said Union Finance Ministry does ask states to do this or that. CST is a tax imposed on inter-state sale of goods and comes in the way of a common Indian market, aimed to be created by the state level VAT and the proposed Goods and Service Tax.
CST was reduced from four per cent to three per cent last fiscal and was scheduled to be further cut to two per cent from April one this year. It is ultimately, proposed to be reduced to zero by the time, GST is introduced from April one, 2010.
In his Budget speech, Chidambaram had said, "It (CST) is now proposed to reduce the rate to 2 per cent from April 1, 2008. Consultations are underway on the compensation for losses, if any, and once agreement is reached the new rate will be notified."
When asked whether CST would be cut with retrospective effect from April 1, 2008, Dasgupta said tax matters are not usually implemented with retrospective effect. "April one has gone. We will do it as soon as possible," he said.
Though, Dasgupta did not attach a number to the losses that states would face, it is estimated that it is more than Rs 6,000 crore (Rs 60 billion) when CST was cut from four to three per cent.
As part of compensation package last fiscal, states were also asked to impose tax on 44 services, but states did not come forward because most of these services were local in nature, which would have not have given much revenue to states.
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