States could levy a higher VAT

12TH FINANCE COMMISSION REPORT/ SERVICE TAX AND VAT

The recommendations do not match the Centre's plans outlined in the White Paper on VAT.

There appears to be a divergence of views between the 12th Finance Commission (TFC) and the Empowered Committee of state finance ministers on value-added tax (VAT). The TFC has proposed a core rate of 12 per cent under VAT against 12.5 per cent suggested in the white paper on VAT.

"For augmenting revenues, most commodities should be placed under the proposed core rate of 12 per cent. The states may be given the option to use a higher rate, if desired," the TFC has said.

It further recommended that "a very small number of goods, under well enunciated principles, should be put under the proposed lower category of 4 per cent."

The white paper on VAT, had, on the contrary, mooted putting the largest number of goods (around 270) under 4 per cent and the remaining items under the 12.5 per cent rate. The white paper had also suggested having 12.5 per cent as the highest rate under VAT.

The commission has said that the Central Sales Tax (CST) should be phased out as quickly as possible and the tax rental arrangement (in the form of Additional Excise Duty) regarding textiles, tobacco and sugar should be formally revoked and these items should be integrated into the overall design of state VAT.

According to the TFC, adoption of VAT would be revenue augmenting in the medium to long run adding that any fall in revenue for the states would be "small and temporary".

SERVICE TAX

Treating service tax as 'shareable', the TFC has said that any legislation that is enacted in respect of service tax must ensure that the revenue accruing to a state under the legislation should not be less than the share that would accrue to it had the entire service tax proceeds been part of the shareable pool.

"Since the service tax has been put under Article 268A, the sharing of its revenues with the states will be taken out of the purview of the finance commission. This may not have been the best among possible option for dealing with the subject," the TFC noted.

As per the present norms, the Centre can assign certain services to the states for collecting and retaining the revenue, but the tax will be levied by the Centre.

The TFC has worked out shares of states with regard to services (excluding Jammu and Kashmir) since the tax is not leviable in the state. The highest share of 19.5 per cent accrues to Uttar Pradesh followed by 11.2 per cent for Bihar and 7.4 per cent for Andhra Pradesh.

"If in any year during the period 2005-10, a tax under union is not leviable in a state, the share of that state in that tax should be put to zero and the entire proceeds should be distributed among the remaining states by proportionately adjusting their share," the TFC said.