Finance Minister Jaswant Singh has made no provision for compensating states on account of the possible introduction of the value-added tax regime for the next fiscal in the interim Budget.

It indicates that the switchover to a VAT regime may go beyond 2004-05.

In the Budget for 2003-04, Singh had provided Rs 700 crore (Rs 7 billion) for compensating states in case of a possible revenue loss in the first year after the introduction of VAT.

He had mentioned a switchover to the VAT regime as one of his tax promises and had also indicated that the ministry would provide additional support if the states demonstrated their fiscal loss due to the new lower VAT rates, instead of levying a sales tax on goods.

The issue of compensation for the states, and the fact that several states were going to the polls this year resulted in them not sticking to the April 1, 2003 deadline for implementing the VAT.

With political agenda overshadowing economic rationale, most of the states discarded the global experience that VAT eliminates the cascading effect of various local taxes.

The traders lobby too proved strong enough to influence the political parties to oppose the reform measures. As a result many states, which were earlier vociferous on introducing VAT dropped out at the last minute.

After missing the April 1 deadline, a second deadline set for July 1 was also missed by states in their effort to usher in a countrywide VAT regime. Following this, the finance ministry announced that new roadmap would be prepared for ensuring the transition to VAT.