New Delhi: The Union government is likely to set aside Rs4,000 crore in the forthcoming budget as compensation to states for suffering revenue losses under the value-added tax (VAT) regime—a 36% hike over what was budgeted in the current fiscal.
The increased allocation in 2007-08 is largely in anticipation of Uttar Pradesh—the only state which has held out so far —joining the VAT regime after it concludes state elections in the first quarter of the next fiscal. This would, however, largely hinge on who comes into power in the state, because the ruling Samajwadi Party (SP) is stridently opposed to VAT.
The VAT regime was introduced in 2005 to avoid the cascading impact of local sales taxes. To encourage states to move to VAT, the Centre agreed to compensate states for any revenue loss incurred on account of VAT.
This was to be made on a reducing scale: 100% compensation in the first year, 75% in the second and 50% in the third year. UP is the only state still to implement VAT. Pondicherry, the only remaining Union territory, has said it will join VAT from 1 April 2007. The government had, in 2006-07, earmarked Rs3,000 crore for compensation, which was later increased to Rs4,100 crore due to arrears accruing from the first year of VAT.
“We are expecting VAT compensation claims from newly joined states like Tamil Nadu to be high next year. Also if UP joins VAT, there could be substantial VAT compensation claims from it. In the first year of VAT, UP will be entitled to 100% compensation of its VAT claims,” said a government official who did not wish to be identified.
Political parties in UP, which are already in the election mode, however, do not see joining VAT as an important issue in the run-up to the state polls. The stance maintained by the ruling SP against joining VAT is that traders in the state are against the new tax regime.
SP member of Parliament Mohan Singh says, “The Rs2,300 crore additional sales tax collection over the past fiscal is proof that UP has not lost by refraining from switching to the new tax regime.”
The ruling party is not isolated in its stand. Even the Bharatiya Janata Party (BJP) has opposed VAT in UP, though it has implemented the tax regime in states such as Rajasthan and Gujarat where it is in power.
BJP’s state unit president, Keshari Nath Tripathi, says the party will follow the central command’s directives from Delhi in this regard. Jagdish Shettigar of the party’s economic cell, however, reminds that BJP had issued clear directives to all its state units in favour of implementing VAT. He refers to the meeting of CMs of the BJP-ruled states, which was called when Atal Bihari Vajpayee was the prime minister. Only UP refused to toe the line, which the party’s state unit continues to do.
Analysts believe none of the parties is likely to push for implementing VAT in UP in a hurry. The reason is the continued opposition of traders, who are being wooed by all parties. Only Mayawati’s Bahujan Samaj Party (BSP) does not have a significant following among traders. So, VAT implementation in UP could stand a serious chance if the BSP were to form a government on its own.
The Centre has so far released Rs5,306 crore as VAT compensation of which Rs2,471 crore pertains to VAT claims of 2005-06 and the remaining Rs2,835 crore are of 2006-07. In addition to the VAT claims released, the Centre is examining compensation claims worth Rs1,459 crore of 2005-06 and Rs1,699 crore pertaining to the current fiscal.
States such as Maharashtra have claims of more than Rs1,200 crore pending with the Centre. Officials said the Centre was awaiting the state auditor general’s report to verify the claims before releasing the money.