The task force on indirect taxes has recommended that any compensation to states for revenue losses arising from their transition to value-added-tax be done by way of additional resource mobilisation through levy of service tax and not through budgetary support.

The Centre has already taken a position to provide monetary compensation to states in case of notional revenue loss following the transition to VAT regime from April 1, 2003.

The panel has also recommended that following introduction of VAT, levy of all other local taxes be discontinued.

In the area of taxation of services, the panel has suggested levying of service tax in a comprehensive manner across all categories, leaving out only a few services which can be included in a negative list.

The report has also suggested the rate of service tax "be suitably enhanced to achieve parity with the Cenvat rate" and that there should be two rates -- one for service providers who avail of credit and a lower rate for those who do not. The Centre presently levies a 5 per cent tax on select services.

The panel has recommended that the additional excise duty may continue for textiles upto 2005, it may continue even thereafter for cigarettes, which should not be subjected to VAT.

VAT schemes should provide for grant of credit of duty by the importing state for the duty paid in the exporting state, in the course of inter-state movement of goods.

In order to ensure stability of the VAT regime, the report has proposed setting up of a VAT Council or a permanent suitable alternative vested with adequete powers to tackle cases of discriminatory taxes and practices and eliminate barriers to free flow of inter-state trade.

According to the Task Force, most vital areas in the countdown to implementation of VAT have been covered by the Empowered Committee of state finance ministers and the task force did not deem it necessary to rexamine most issues.

The panel has, however, recommended the need for unformity of all state legislations, procedures and documentation relating to VAT.

In case of taxation of services, the report has also called for extension of duty credit scheme to the service sector.

"There should be complete integration of the Cenvat credit and service tax credit scheme with effect from April 1, 2003," the report has said.

The panel has recommended the service providers who provide service tax upto a value of Rs 10 lakh (Rs 1 million) in a financial year should be subjected to a tax of one per cent on the value of services, on the basis of an annual declaration.

It has recommended the need for a separate legislation for levy of service tax, which should eventually be integrated with the central Excise law.

The panel has also said services should be classified according to WTO (World Trade Organisation) classification, which should be made part of the service tax legislation.