New Delhi: The government has decided to increase the value- added tax (VAT) rate to 5% in March 2008 and to further raise it to 6% by March 2009, up from the current 4%, according to senior government officials.
The decision, which will keep the rate intact this year despite expectations that a new rate will come into effect on 1 April, was taken by the empowered committee of state finance ministers on VAT.
The move will increase prices of 149 items such as tea, flour, handloom, used cars and toys. These are all considered intermediates. Finished products typically have a value added tax of 12.5%
The changes in VAT rates are being initiated in preparation for the phase-out of the central sales tax and introduction of a single goods and services tax by 2009-10.
Meanwhile, the Centre has indicated to the empowered committee that it will provide a budgetary support of Rs2,500 crore in the next fiscal as grant-in-aid to compensate states for losses that they will suffer on account of the cut in Central sales tax from 4% to 3% from 1 April 2007. The budgetary support will be provided until 2009-10.
Finance minister P. Chidambaram will introduce a Taxation Law (Amendment) Bill, 2007, in the ongoing Budget session to effect the reduction in Central sales tax.
The cabinet had on Thursday approved a compensation package for states in lieu of the reduction in CST from 4% to 3% from 1 April 2007. The package comprises monetary budget support and non-monetary measures. It has also been decided that any state which has already reduced its CST to 3% or below would not be eligible for compensation during 2007-08.
As per the agreed package, VAT would be introduced on tobacco from 1 April 2007 and on textiles from 1 April 2008. In addition to this, the Form D, which provides a concessional rate of 4% on inter-state purchases made by government departments, will be withdrawn.
With the withdrawal of the form, state and Central government departments will have to pay the normal VAT rate on an item purchased from a state, other than where it is located. The move is expected to generate an additional Rs1,500 crore to states.
It has also been decided that the Centre will collect and appropriate to the states service tax collected on 33 services which are local in nature. “The states have indicated that they need at least one year to put in place the mechanism for taxing services. Therefore, the Centre will collect and distribute the tax to the states as an interim measure in 2007-08,” an official said.
The Centre is also likely to bring some of the 44 new services, also of local nature, under service tax.
There are 99 services at present under the service tax net. Of this, the Union government has agreed to share the proceeds of 33 services which of intra-state nature with the states and bring 44 new services such as legal services, education and health, hotel and restaurants, electricity transmission and distribution and entertainment services under the tax net.
The 33 services which already attract service tax include mandap services, commission agents, rent-a-cab services, real estate agents and security services.