New Delhi: Indian states have reached a consensus on imposing value-added tax (VAT) on sugar and textiles from 1 April, in a move that will shore up their revenue, but also stoke inflationary pressures. The decision was taken at a meeting of an empowered committee of state finance ministers’ on goods and services tax (GST) on Friday.
The Union government had removed additional excise duty (AED) on sugar and textiles, and states were free to impose tax on these commodities. But since all did not impose VAT, it led to diversion of trade from states that did so to those that did not. The states that do so levy VAT of 4-5% on these two items. The empowered panel’s decision comes in the wake of revenue loss on account of the removal of AED.
File photo Sugar (Bloomberg)
“Earlier, additional excise duty was levied on tobacco, sugar and textiles by the Central government, and as per the recommendation of the 12th Finance Commission, the states were getting 1% more of the devolution,” said Sushil Modi, Bihar deputy chief minister and chairman of the empowered committee.
“But then the Centre removed AED from 1 April 2006, and the 13th Finance Commission recommended that states should not get the 1% extra devolution”.
In 2005-06, revenue collected as AED from sugar and textiles was Rs 1,220 crore and Rs 2,300 crore, respectively. Levying VAT on sugar is not likely to have much of an impact on the poor, said K.M. Mani, Kerala’s finance minister, since it’s “supplied at subsidized prices through the public distribution system to the weaker sections of society”.
The states are also concerned about the slowdown in revenue growth in the first half of this fiscal. “Average growth in revenue in the first six months for states is around 20%. This is lower (than) the growth registered in the previous year,” Modi said. “The revenue loss is mainly from three sectors”—automobiles, construction and petrol.
Modi said the Prime Minister’s Office has written a letter to the empowered committee and sought its opinion on bringing natural gas and regassified liquefied natural gas under the declared goods category, where there is a uniform tax rate of 5%.
“The government wants to put natural gas and regassified liquefied natural gas under the declared goods category. Currently,, most states impose a tax of around 12%,” said Modi. “Though it will be discussed in detail at the next meeting, most states are opposing this as it will lead to a revenue loss for them.”
Indicating that the Centre still has some way to go before inspiring confidence among the states over the transition to GST, Modi said they were angered by a delay in compensation for pha-sing out central sales tax (CST). “We will write a strongly worded letter to the Union finance minister,” he said. “Though there is a budget provision of Rs 12,000 crore for CST compensation, states haven’t got any money.”