This was decided after all states, except Uttar Pradesh and two other states said they were ready with the necessary legislations.

Announcing the package after a marathon meeting with states, finance minister P Chidambaram said, "I am very happy to report that the empowered committee on VAT has taken some major decisions, including compensation package for states for any loss of revenue (after VAT introduction)."

However, the 4.0 per cent central sales tax would continue in the first year (2005-06), but eventually it would be phased out, for which a timeframe would be worked out by the VAT panel.

"But there would be no change in CST in 2005-06," he said, adding VAT panel would work out a timeframe for CST phase-out.

Chidambaram said the 3-tier package would be 100 per cent compensation for revenue loss in the first year, 75 per cent in the second year and 50 per cent in the third year.

Asked what would be the outgo of the centre for compensating states, Chidambaram said, "There may be nothing, going by the Haryana experience."