The action on tax reforms will naturally focus on elimination of this 4 per cent central sales tax, before 2010. For mega cities like Delhi and Mumbai, this is a big deal as they depend a lot on inter-state movement of goods. The other scene of action would be service tax. States have to harmonise their service tax with the VAT rates on goods. At the central level, business already gets seamless credit for taxes paid, whether on service or excise. But the rates of tax on goods and services are different. Since the current excise duty is 16 per cent and service tax at 12 per cent, watch out for a median rate emerging in the next budget.

These would be the ingredients for the Centre to introduce a Goods and Services Tax (GST) to replace the current excise and services duties by 2010, as promised by finance minister P. Chidambaram. There would be two stages to it. At one level would be a tax to replace all central excise and services levy to a common rate. At the other level, states would also amalgamate their VAT on goods and services tax into a state-level GST. Thus there would be only two slabs of indirect tax, across the country.

Already in less than two years, VAT has become the biggest success story of Indian public finance. But this is not just because it has helped the states to shore up their fiscal muscle considerably. There is scope for more. Before the introduction of VAT, the annual collection from sales tax and central sales tax by all states was about Rs 1,05,000 crore. But all estimates were sure this was just about 50 per cent of the potential revenue. Since tax evasion was widespread, the states lost out.

... contd.