States that do not switch to the value-added tax in this fiscal are likely to be compensated for only 75 per cent of their notional revenue loss in the first year after transition to the new tax. States switching over in 2003-04 would get 100 per cent compensation, finance ministry officials said.

Finance Minister Jaswant Singh on Tuesday told a Bharatiya Janata Party committee on VAT that the Centre would not put pressure on states to shift to the new tax, but the lower compensation in effect punishes states for missing the deadline.

According to the officials, states had also been told that any deviation from the set principles of VAT, like continuing with the levy of additional imposts, would also result in lower compensation.

The Centre's original VAT compensation package prescribed 100 per cent reimbursement of the notional revenue loss in the first year of transition to VAT, 75 per cent in the second year and 50 per cent in the third. The Centre has set aside Rs 700 crore (Rs 7 billion) in the Budget for 2003-04 on this head.

It has also agreed to compensate states for the Rs 6,000 crore (Rs 60 billion) revenue loss this fiscal because of the halving of the Central Sales Tax to 2 per cent.

The finance ministry officials said the Centre would also not allow states that refused to switch to VAT in this fiscal to tax services.

While the finance ministry would shortly introduce a comprehensive service tax legislation specifying the services to be offered to states for levying the 8 per cent tax, only those states that switched to VAT in 2003-04 would be allowed to levy it, they added.