The 'white paper' on Value-Added Tax, released by Finance Minister P Chidambaram on Monday lays down a roadmap for levy of an uniform state-level tax on over 500 items, exempts 46 local and social items and gives states an option to exempt food grains for a year.
More than 550 items would be covered under the new tax regime of which 46 natural and unprocessed local products would be exempt from VAT, West Bengal Finance Minister and VAT panel chairman Asim Dasgupta told reporters on Monday.
About 270 items including drugs and medicines, all agricultural and industrial inputs, capital goods and declared goods would attract 4 per cent VAT.
The white paper on VAT, which would replace the sales tax regime in states with a two-tier tax regime of 4 and 12.5 per cent VAT, was drawn up after all states barring Uttar Pradesh were prepared to implement VAT from April.
Chidambaram and Dasgupta will visit Uttar Pradesh after January 26 to sort out differences.
Releasing the 18-page paper of Empowered Committee on VAT, Chidambaram said: "We have formed a rainbow coalition to undertake one of the biggest tax reforms since Independence."
Considering the difficulties faced by the tea industry, it was decided that tea-producing states would be given an option to levy 12.5 per cent or 4 per cent subject to review in 2006.
Remaining items would attract 12.5 per cent VAT. Precious metals like gold and bullion would be taxed at 1 per cent.
Petrol and Diesel would be kept out of VAT regime, which covers only marketable items, Dasgupta said, adding that the panel was yet to take a view on CNG.
Following opposition from some of the states, it was decided that states would have option to either levy 4 per cent or totally exempt food grains but it would be reviewed after one year.
Three items -- sugar, textile and tobacco -- covered under Additional Excise Duties, will not be under VAT regime for one year but the existing arrangement would continue.
The VAT panel relaxed the threshold limit for traders coming under VAT regime from Rs 5-50 lakh (Rs 500,000-5 million) of turnover from the previous stance of Rs 5-40 lakh (Rs 500,000-4 million).
Traders within this limit can pay a composite VAT rate of 1 per cent but would not be entitled to input tax credit.
Chidambaram encouraged all states to implement the new tax regime saying: "On behalf of the Centre, I promise to fully cooperate with you, compensate you and help in building a computer network system and resolve all problems."
States would get 100 per cent compensation for revenue loss, if any, in the first year, while 75 per cent of the loss would be compensated in the second year and 50 per cent in the third year.
The Central Sales Tax of 4 per cent, which yields Rs 15,000 crore (Rs 150 billion) to states, would be phased out after April 2006.
"In a way it (VAT) is no different from excise duty. In course of time, it is our dream to move on to Goods & Services Tax (GST) in future," Chidambaram said.
GST would ultimately replace Excise Duties and Service Tax to emerge as a national VAT. The state-level VAT would also be integrated into it.
Dasgupta said the cascading effect of tax will come down after introduction of VAT, bring down the price level, stop 'unhealthy tax rate war' and trade diversion among states.
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