After 54 years, states free to levy VAT on sugar and textiles

The Union government has allowed the states to impose tax on sugar and textiles for the first time in 54 years.

In his Budget, the finance minister proposed to amend the Additional Duties of Excise (goods of special importance) Act, 1957, and decided to remove sugar and textile from its schedule. After this amendment, states are free to levy value added tax on these commodities after 54 years.

These commodities were put under the scheduled commodities, with the enactment of the Additional Duties of Excise Act in 1957 by the Nehru government. Earlier, the Centre could only levy this tax on these commodities.

Due to the amendment, the Centre has given back these powers to states, which are scouting for revenues, post implementation of the goods and service tax.

“States will be free to levy VAT on them once the finance Bill is signed by the President and it comes in force,” said Dilip Dixit, senior advisor, Tax & Regulatory Services, Indirect Tax, KPMG. However he feels, “It is unlikely that any state government will do so in the near future.”

The tax on these commodities could be a maximum of five per cent.

In another such move where tax on commodities could go up at the state level, Section 74 of the Finance Bill has been used to amend Section 15 of the Central Sales Tax Act. After the amendment, the upper limit for taxation of declared goods under the local VAT law will be five per cent instead of 4 per cent.

At present, about 16 commodities are notified as declared goods. These include coal, cotton, cotton yarn, crude oil, hides and skins, iron and steel, jute, LPG for domestic use and oil seeds. The amendment will be effective after passing of the Finance Bill.

This was done in synchronisation with the provision to increase merit rate of excise which is applicable for industrial raw materials to five per cent, states have also been given powers to have 5 per cent tax on them.

Dixit said, “It is certain that all the states will increase the local VAT rate applicable to declared goods from four per cent to five per cent sometime in May 2012 on a rough estimate The Maharashtra government will net about a thousand crore from this change.”