New Delhi: With 17 States ready with VAT (Value Added Tax) bills, Finance Minister P Chidambaram today (Sep 23, 2004) promised to fully compensate States in the first year of introduction of Value-added Tax scheduled in April, 2005.

"I am very happy to say that we are on the right path and proceeding at the right pace. 17 States have their VAT bills ready... All is going well, we hope to introduce VAT by April, 2005," Chidambaram told reporters after a meeting with the State Finance Ministers in New Delhi.

He said there were broad discussions on compensation, additional excise duties (AED) on some items, phasing out of Central Sales Tax, technical assistance to States and tax information network system TINXSYS. "There is a broad consensus on all these items," he said.

Asim Dasgupta, chairman of the Empowered Committee on VAT thanked Chidambaram for agreeing to compensate States fully (100 per cent) for any revenue loss in the first year.

It was agreed that the Centre would compensate to the extent of 75 per cent of the revenue loss in the second year and 50 per cent in the third year, Dasgupta said.

Chidambaram also said that there will be a gradual phase out of CST, the formula for which would be finalised after consulting the technical experts committee on VAT, headed by Govinda Rao of NIPFP, in October.

The VAT panel will again meet Chidamabaram for discussing whether or not to grant powers to States to levy service tax and also for determining the item for additional excise duty (AED).

Satisfied with the progress of States on VAT, Chidambaram said all the states are expected to be ready with their VAT bills by November this year.

The VAT bills, after getting approved from the respective State Assemblies, would be sent to Union Finance Ministry and Law Ministry and finally to the President for his assent.

Chidambaram said Madhya Pradesh had already obtained President's nod while four States have sent their papers and other were processing it.

Terming today's meeting as "fruitful", Dasgupta said, "In a mould of cooperative federalism, we may succeed in VAT implementation by April 2005."

However, he said the Centre would have to come out with a compensation formula when VAT is introduced, based on the growth in revenue of States taking 2004-05 as the base year.

Regarding CST, he said the Centre would fully compensate for the CST phase-out in the first and second years of VAT introduction and there would be a review in the third year.

While maintaining that the Centre expects no major revenue loss of States after switchover to VAT, Chidambaram said, "There are one or two cliches which have to be ironed out."

Asked about Uttar Pradesh, which has been apprehensive about implementing VAT, Chidambaram said, "There is no philosophical difference with UP, it is only practical problems."

Chidambaram and Dasgupta would meet UP Chief Minister Mulayam Singh Yadav in October to iron out differences.