In a day long conference of chief ministers and state finance ministers, Finance Minister Yashwant Sinha said the rate war, fiscal incentives and local considerations would do them more harm than good in the long run.

Referring to the problems faced by depositors from some NBFCs and in incorporated bodies, Sinha said there was an urgent need to effect further improvement in the regulatory regime. "Legislative changes made in 1997 improved regulation and RBI has sought to address the problem. But the arrangements do not seem to be adequate," he said.

Sinha said there had been a mushroom growth of NBFCs and in some cases even of fly-by-night operators who had enticed gullible depositors and were not in a position to return their deposits. "Thesedepositors are having to run from pillar to post as the deposit taking companies have defaulted on the contractual obligations,'' he said.

He said that the response of the centre and the states to the depositors problems should be properly modulated so that better performing NBFCs were encouraged to grow along sound and healthy lines.

He asked states to supplement the Centre's and RBI's efforts in early detection and prevention of frauds by some of the NBFCs on unsuspecting depositors and redress their grievances. Reverting to the subject of harmonisation of tax structure, Sinha said state governments must take steps to create necessary conditions for introduction of VAT including adoption of floor rate, abrogation of fiscal incentives and reaching an agreement about reform of central sales tax.

A pool of trained tax officials would have to be created through proper training on structure and administration of VAT prepare education material to be disseminated among trade and industry on its merits. Onthe progress made since the conference of chief ministers and state finance ministers in July last year, Sinha said the working group of state finance ministers had submitted its recommendations.

Also, the model statue on VAT had been prepared by the national institute of public finance and policy. With these developments, Sinha said the conference must decide on a timetable for sequential introduction of VAT by all the states but not later than 2000 AD.

There should be an agreement to reduce the number of rates, keep tax exemptions to the minimum, reduce tax rates on inputs by allowing partial set-off, and exchange of information among states on tax related matters. Sinha asked states to deliberate seriously on the issue of rationalising central sales tax (CST) which was primarily designed as a regulatory measure to prevent evasion and bring order in inter state taxation.

CST, which is a significant component of sales tax revenue of states, has tended to act as a barrier to free flow of trade in thecountry inhibiting the growth of the common market and thereby of employment and output in the economy.