States have finally agreed to play ball on value added tax (VAT) rollout. After missing over five deadlines since ’01, states have now agreed to switch over from the existing sales tax system to VAT from April 1, ’05.

A political consensus on the new deadline was arrived at the end of the extended meeting of state finance ministers here on Friday. Finance minister P Chidambaram, who was invited to the meeting, assured states that losses, if any, arising from the implementation of VAT and phase-out of central sales tax (CST) would be compensated.

"The details on the principle, quantum and period will be worked out by the finance ministry in consultation with states," Asim Dasgupta, chairman of the Empowered Committee of State Finance Ministers and West Bengal Finance Minister, told reporters here. This effectively means that the compensation formula proposed by former finance minister Jaswant Singh would be reviewed.

The phase-out of the CST would be co-terminus with the introduction of VAT. This means that the CST rate would be cut from 4% to 2% only in the next fiscal.

The common minimum programme of the United Progressive Alliance (UPA) proposes implementation of a national VAT. Mr Dasgupta said this would be a long-term goal.

Uttar Pradesh and three other states have indicated that there would be practical difficulties in implementing VAT.

Mr Dasgupta was, however, confident of sorting out these glitches before the deadline. States would also be given some flexibility on goods of local importance.

In the coming months, state governments will interact with traders and industry at the national level, within the state and the district level. Traders with a turnover of Rs 5 lakh would be completely outside VAT. Those with a turnover of above Rs 5 lakh and up to Rs 40 lakh would be offered a composition scheme, under which, instead of VAT they would pay 1% of the gross turnover. "That takes care of the anxiety of traders on a big way," Mr Dasgupta said.

Mr Chidambaram has promised to expedite the process of obtaining presidential assent to enable states to introduce VAT laws in legislative assemblies.

The draft service tax Bill — on distribution of taxable services — is also up for review as states reckon that the bill in its present form would not shore up their revenue base significantly. States need extra revenues to offset possible losses on account of implementing VAT. By virtue of a constitutional amendment, the Centre has the powers to levy service tax, the proceeds of which can be collected and appropriated by the states and the Union.

"We have asked for merging the list of services under schedule III — where the Centre will retain entire proceeds — with services under Schedule II where the proceeds would be shared by the Centre and states," Mr Dasgupta said.