The empowered committee of state finance ministers today slashed the value-added tax (VAT) rate on all drugs to 4 per cent from the proposed 12.5 per cent.
This will translate into annual revenue losses of over Rs 5,000 crore for states. The decision to bracket drugs under the 4 per cent VAT rate will, however, spare some essential drugs, which will continue to be exempted.
Sources in the committee said the decision would further jeopardise the VAT schedule because the Centre would have to compensate the states for these losses as part of the agreement between them.
In deference to the agitation by small traders against the new tax regime, the committee has also decided to raise the annual turnover limit for traders to join the VAT net to Rs 40 lakh from Rs 25 lakh.
Under the new turnover limit, there will be a 1 per cent tax on the gross turnover, instead of the value-added tax for traders with a turnover in the range of Rs 5-40 lakh. Traders are exempted from paying VAT up to a turnover of Rs 5 lakh.
In view of the demand by states like Gujarat and Maharashtra to continue industrial exemptions, the committee has decided to allow states to continue with tax incentives, along with the deferral and remission models agreed upon earlier, as long as they do not break the VAT chain.
Maharashtra and Gujarat had been seeking the continuation of sales tax exemptions following the introduction of the value-added tax, instead of the deferral model proposed earlier.
Under the deferral model, units defer their liability to the state governments to be made good later.
The exemption model for treatment of incentive schemes would break the VAT chain and, therefore, the deferral model was chosen by the empowered committee.
Over the past few decades, various state governments have resorted to a plethora of tax incentive schemes to encourage the development of backward areas through private sector investment. The quantum of incentives varies on the nature and quantum of investment, and the products manufactured.
Today's meeting of the empowered committee was unable to resolve differences over the issue of treatment of incentive schemes. A final decision will be taken at the next meeting of the committee on April 29 and April 30.