The value-added tax is likely to be implemented across states only in 2005, after the general elections.

According to members of the empowered committee of state finance ministers on VAT, opposition within the BJP and from traders has cleared the way for Finance Minister Jaswant Singh to close the door on VAT.

The committee had declared that 15 states would stick to the June 1 deadline, but Singh's statement in Parliament on Tuesday ended all hopes of even a partial implementation of VAT in 2003.

With Assembly elections coming up in Delhi, Rajasthan, Madhya Pradesh and Chhattisgarh later this year, and the general elections in 2004, a delay beyond June 1 would defer the nationwide introduction of VAT to 2005, government officials pointed out.

The finance ministry is now planning a checklist of the deviations in the VAT laws of states from the Centre's model Bill drafted by B N Atre.

When states submitted their laws in February, the President had sought clarifications on items under each tax bracket, the incentive schemes, and so on.

"States were cut up over this action, and saw it as a surrender of their sovereignty for monetary compensation," a state government official said.

Officials in the revenue department said states could not expect compensation for notional losses if VAT was implemented in a patchwork fashion.

"Haryana may have put VAT in place, but it will not receive compensation," an official pointed out. He added that the VAT Bills of states had to follow what the finance ministry had prescribed.

States say the model VAT legislation does not take into account procedural realities and has been drafted only from a legal perspective.

For the finance ministry, however, the wide disparities reflect the poor state of preparedness by states for a new regime.

The ministry has also made it clear that reduction in the central sales tax from 4 per cent to 2 per cent is not possible unless all states shifted to VAT in 2003-04, which is ruled out now.

Singh had earlier stated in Parliament that a reduction in the central sales tax was contingent on the introduction of VAT by the major states.

At the April 23 meeting of the empowered committee on VAT, states had reduced the tax rate on medicines from 12.5 per cent to 4 per cent, which would bloat the compensation kitty by another Rs 5,000 crore (Rs 50 billion).

This move was also not appreciated by the finance ministry, which had already undertaken to provide for notional losses arising from the transition and from a reduction in the central sales tax.

Members of the empowered committee said states still had an option to shift to the new regime but, like Haryana, forego the compensation.

While some southern states did not mind the sacrifice, others wanted to hedge the adverse impact on revenue and toe the central line.

Delay signals

• With general elections in 2004, a delay beyond June 1 will defer VAT to 2005.
• Empowered panel members say opposition from BJP, traders made closing VAT option easier.
• Finance ministry plans checklist of deviations in VAT laws of states from model Bill.
• States say model VAT law has been drafted only from a legal perspective.