Theoretically it is easier to import goods to Mumbai from abroad than from Kolkata. And the culprit responsible for this anomaly is the archaic sales tax system in the country.

Today, if goods have to be transported from Kolkata to Mumbai by road, they have to pass through the states of West Bengal, Jharkhand, Orissa, Chattisgarh, Madhya Pradesh and Maharashtra. At each state, various taxes are levied, which increases their prices. Further, there is considerable paper work involved, which can lead to the goods being held up for days.

Under the present tax regime, double tax is levied on all processed and manufactured goods, increasing the cost of the final product. Under the proposed value added tax (VAT), only the value-added portions will taxed. This mechanism ensures that the tax is neutral regardless of how many transactions are involved

All these and more glitches will be eliminated if the states implement the VAT. VAT was supposed to be introduced in April 2003 but the state government delayed enacting the legislation as they feared loss in their revenues. Traders also lobbied strenuously against VAT as they would be required to keep books of accounts to claim credits under VAT.

Today, 120 countries have embraced VAT. Their experience has been positive. In India, Haryana implemented VAT in April 2003 and since then the state''s revenues have gone up.

However, like all good things, all bad things must also come to an end. That happened on November 2, when finance minister P Chidambaram announced that 26 states have enacted legislation to usher in the VAT regime from April 1, 2005. Three states — Uttar Pradesh, Manipur and Nagaland — are yet to enact the laws but the centre is negotiating with them.

The finance ministry has reached an agreement with state governments over the compensation package to be availed by them to offset possible revenue losses during the initial transition period.

Chidambaram met with the finance ministers of the states and cobbled up a formula for compensating the states if there is a fall in their revenues. Accordingly, states would be entitled to 100 per cent compensation for any revenue loss in the first year, followed by 75 per cent and 50 per cent in the second and third years, respectively.

This computation, in turn, would be worked out on the basis of the actual annual sales tax growth rates registered during the last five years from 2000-01 to 2004-05. Of these five years, the average of the `best three years'' will form the reference growth rate that would be employed for estimating the revenues that would have accrued to the states had the existing sales tax regime continued from 2005-06. The compensation sums would then be arrived at, by subtracting the actual revenues flowing after the introduction of VAT from the projected revenues taking the reference growth rate.

Asim Dasgupta, the West Bengal finance minister and chairman of the empowered committee on implementation of VAT, said that the compensation formula would be applied on a state-by-state basis. This would mean working out reference growth rates for each state, taking into account their actual annual sales tax growth during 2000-01 and 2004-05 and averaging out the best of three years individually.

Chidambaram, on his part, held that the compensation outgo for the centre may be nothing going by the experience in Haryana. "In our assessment, we expect surplus revenues from states with the implementation of VAT. So, there may not be any requirement for compensation," he said.

The state finance ministers have also agreed that central sales tax (CST) and the additional excise duties in lieu of sales tax (AED) will remain in their present form till 2005-06.

In the original plan to switch over to VAT, CST was to have been phased out with the introduction of VAT, and Jaswant Singh, former finance minister, had proposed halving the rate to 2 per cent in his 2003-04 union budget.

In order to offset the losses from the CST duty cut, the ''additional duties of excise (goods of special importance) act'', 1957, was sought to be amended to allow states to levy sales tax on sugar, textile and tobacco products.

Currently, the centre imposes ''additional duties of excise'' on these items and transfers an additional 1.5 per cent of its tax proceeds to states in return for their not charging sales tax on them. Under Singh''s proposal, the states were to be given powers to levy sales tax on the three commodities, even while they would continue to obtain the additional 1.5 per cent devolution from central taxes.

But none of these proposals finally saw the light of the day. The latest decision merely reinforces the status quo till 2005-06. The 4 per cent CST rate will remain till a new ''empowered panel of state finance ministers'' re-works the modalities for the phase-out. Thus, VAT will take off from April 2005, even as the current CST regime stays.

While the ruffled feathers of the state ministers have been smoothened, it is now up to Chidambaram and Dasgupta to rope in the traders to accept VAT. Towards this end, Dasgupta has said that they would meet the representatives of every trader association and council to convince them about the benefits of VAT.

In 2003, the traders had a two-day countrywide strike, which led to the postponement of VAT. So, Dasgupta and his team will have to stretch their negotiating skills.