A majority of states on Friday made history by introducing Value-Added Tax, regarded as a rational system that prevents cascading effect of tax, checks evasion and augments revenues.

"Twenty states have switched over to VAT today. Meghalaya will join them next week," Empowered Committee Secretary Ramesh Chandra told PTI on Friday.

He said Tamil Nadu may join the league after the state assembly elections.

With Friday's development, India has become one of the few nations to implement VAT at a fast pace within four years. VAT implementation in European Union, Canada and the United Kingdom took more time.

VAT introduction comes after an assurance from Finance Minister P Chidambaram on compensation for revenue loss coupled with Empowered Committee's decision to double the exemption limit and reduction in the tax rate from 1 pre cent to 0.25 per cent for traders with a turnover of Rs 10-50 lakh.

While 20 states replaced the five-decade old Sales Tax regime by the modern pro-reform VAT amid strong resistance from traders, eight states -- Uttar Pradesh, Tamil Nadu, Uttaranchal and five BJP-ruled states -- decided to continue with the old tax regime.

Although the Bharatiya Janata Party was instrumental in setting up the Empowered Committee in 2001 and initiating the process of VAT introduction when it was in power, the party is now opposed to the new regime as Centre has decided to retain the Central Sales Tax in the initial years.

Chandra said VAT panel will have more talks with BJP leaders shortly for persuading them to reconsider their stance of not implementing VAT in Rajasthan, Gujarat, Madhya Pradesh, Jharkhand and Chhattisgarh.

The VAT panel may also meet Uttar Pradesh Chief Minister Mulayam Singh Yadav in the coming days.

VAT panel Chairman and West Bengal Finance Minister Asim Dasgupta, who was busy due to his state budget in the last few days, is likely to meet the top leaders in the reluctant states in the next few days.

Although the VAT panel had announced broadly the VAT rates for over 550 items, it may revise some of them after June 2005.

Out of these 550 items, 46 natural and unprocessed local products would be exempt from VAT, as per the White Paper prepared by the panel.

About 270 items, including drugs and medicines, all agricultural and industrial inputs, capital goods and declared goods would attract 4 per cent VAT.

States have the option of levying 0 or 4 per cent VAT on grains. Tea-producing states can levy 12.5 per cent or 4 per cent taxon the product subject to review in 2006. Precious metals like gold and silver would be taxed at 1 per cent.

Remaining items would attract 12.5 per cent VAT.

Petrol and diesel would be kept out of VAT regime, which covers only marketable items. Chandra said there would be no major changes from what has already been announced.

Tax experts said that investment and trade will shift out of the states not implementing the new tax to those who have the VAT regime.

From Friday, the sales tax exemption forms such as ST1 (exemption for last-point goods), ST 35 (exemption for first-point goods) and ST 49 (exemption for exports) will be done away with. Traders will instead have to pay tax at every stage of value addition and claim credit for tax paid in the VAT implementing states.

For instance, if an input costing Rs 100 with a VAT of Rs 50 is, after value addition, sold for Rs 200 with a VAT of Rs 75, the tax liability of the trader to the government will be the input VAT minus the output VAT -- Rs 75-Rs 50 = Rs 25.

According to a tax official in the Delhi government, the only change in the new regime will be that the assessment forms or return forms will have additional columns requiring traders to give details about the tax paid on goods and the credit due to them.

The returns have to be filed monthly for big traders and once in three months in case of small dealers.

Rajan D Gupta, head of indirect tax practice at Khaitan & Co, pointed out that traders would have to maintain an input tax credit register along with details of their invoices.

Those with opening stocks on April 1, will, according to the state-specific VAT rules, be required to furnish physical details of their stocks to obtain VAT credit for taxes paid.