VAT TO HIKE BY 1% NEXT YEAR

VAT to pinch harder next year, States told to hike rate by 1%

GANGTOK, August 08: Get ready for a post-election tax hike. The finance ministry has once again asked the State Governments to consider increasing the 4% value added tax (VAT) on intermediate goods by 1% from 2009-10.
Consequently, the prices of a horde of products such as flour, rice, wheat, pulses, edible oils, drugs, kerosene oil, paper, matches, sewing machines and bicycles may rise from next fiscal.
The Centre’s proposal is a part of its ongoing dialogue with states to hammer out a compensation package for them to meet the revenue loss arising from the reduction in the central sales tax (CST). The 1% increase in the VAT rate was originally scheduled for this fiscal.
Many states, however, refused to do so due to approaching elections and also because of higher inflation. It may be noted that the stalemate over this issue had also led to the delay in a further reduction of CST to 2% this year. The Centre had to finally agree to provide monetary compensation of over Rs 6,000 crore to states.
However, North Block is of the view that it will not be able to provide more monetary support to states from 2009-10, when the CST rate is cut to 1%. States should instead consider looking at additional sources of revenue generation such as hiking the VAT rate. It also expects inflation to cool down by next year, so increasing the tax rate will not have a very huge impact.
The empowered committee of state finance ministers is expected to discuss the issue in its next meeting later this month and try to build a consensus on it over the course of the year.
A two-stage VAT rate hike was in fact a part of the original compensation package agreed upon between the Centre and the states in January 2007. According to the decision taken then, states were expected to increase the VAT rate from 4% to 5% in 2008-09 and then to 6% from 2009-10. In addition, they will also get the power to levy service tax on 77 services along with monetary compensation from the Centre.