“The VAT on items will go down from 12 per cent to five per cent in most states if put under declared goods,” they said. This indirectly will bring down the retail price of the items for end users.

Officials also clarified that the decision to ask states to bring CNG under declared goods has been taken to insulate the impact of rising fuel cost on some sections of the society who use public transport mainly buses, auto rickshaws, taxis, etc. It will also have an indirect impact on transport costs of other commodities, they added. The three state-owned oil companies increased petrol prices in November by Rs 1.82 a litre, which was the fifth increase in a row this year and second increase in the last two months. The petrol prices went up by Rs 2.5 a litre in January, Rs 5 a litre in May, Rs 0.33 a litre in July and Rs 3.14 a litre in September.

Official sources in the state government here said it is difficult to bring down VAT collection drastically since tax from industrial activity, especially automobiles, construction, steel and cement is already on a downside. In fact, they added the VAT collection in the first half of the financial year has slowed by 18 to 20 per cent.

The suggestion has been made by the finance ministry to the empowered committee of state finance ministers. VAT is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the ‘value added’ to a product, material or service and from an accounting point of view, VAT on an item is decided by its stage of manufacture or distribution. The manufacturer remits to the government the difference between these two amounts, and retains the rest for themselves to offset the taxes they had previously paid on the inputs. Some time back, the prime minister had suggested the states to bring natural gas and imported liquefied natural gas (LNG) under ‘declaredgoods’ status.

Meanwhile, states have been demanding timely compensation for the loss in central sales tax rate under the Goods and Service Tax (GST) regime. Till now, the Centre provided for Rs 12,000 crore compensation in the budget for 2011-12 but states had only received Rs 909 crore so far and that too for the previous year, said an official source.

Source: Business Standard, India,  dated 13/11/2011