VAT: Compensation yes, but with riders

The Centre will not compensate the financial loss suffered by state governments in implementation of value added tax if they hike trader's threshold limit of gross annual turnover from Rs 500,000.

"Many states have requested for hiking the gross annual turnover to Rs 10 lakh (Rs 1 million) from Rs 500,000, the current threshold limit for imposition of VAT. In that case, the government will not compensate the financial loss suffered by those states," Empowered Committee of State Finance Ministers member secretary Ramesh Chandra said in Mumbai on Tuesday.

Chandra, speaking at the seminar on state VAT organised by Bombay Chamber of Commerce and Industry, said VAT is purely a states' subject and Centre has assured to compensate the financial losses suffered by the states which implement VAT.

"Most of the states may not suffer any financial losses. States like Tamil Nadu, Karnataka and Maharashtra may face financial losses. However, states which hike the threshold limit will not be compensated," Chandra said.

He said irrespective of some states opting to stand out, the government is firm on the decision to go ahead and to implement the tax regime within the schedule.

"Though Uttar Pradesh has some problems in implementing VAT, 25 states and almost all union territories have cleared their law to implement it," Chandra said.

Jharkhand and Tamil Nadu would soon have a legislation in place. Union territories like Pondicherry and Daman and Diu are also bracing ahead to implement VAT, he said.

Many states have requested for hiking the gross annual turnover to Rs 10 lakh from Rs 500,000, the current limit for imposition of the VAT.