The finance ministry is planning to delay the taxation of services by states even as the committee of state finance ministers is likely to set June 1 as the date for the nationwide implementation of the value-added tax.

Senior finance ministry officials said the implementation of VAT by a few states would not serve its purpose. Only 12 states are expected to make the transition by the new deadline.

States have demanded the right to tax services to make up for the initial drop in their tax revenue after the introduction of VAT. But, the ministry may be tight-fisted with the list of services in the comprehensive service tax law to be introduced soon.

It will, however, provide Rs 6,000 crore (Rs 60 billion) in additional compensation to states for halving the central sales tax to 2 per cent in 2003-04.

The Centre earmarked Rs 700 crore (Rs 7 billion) in the Budget for 2003-04 to take care of notional losses that states might incur after the transition from sales taxes to VAT.

However, it did not announce any compensation for the withdrawal of the central sales tax. In 2002-03, revenue from the 4 per cent tax was over Rs 12,000 crore (Rs 120 billion).

The revenue department suggested a 100 per cent compensation for the reduction in central sales tax in the first year. Its reduction to 2 per cent and commensurate compensation would lower the Centre's finances by Rs 6,000 crore (Rs 60 billion) in 2003-04, officials of the department said.

So, while the finance ministry is ready to compensate states for notional losses and for the central sales tax, it will ensure that they implement VAT at the earliest for them to stake a claim on the service tax kitty.

A Bill to amend Articles 268 and 271 of the Constitution for inserting services as a taxable entity has been introduced in the current Budget session of Parliament.

It was decided that the finance ministry would bring in a subsequent Bill to specify services to be taxed by the Centre and states.

While pan-India services like insurance, freight forwarding and telecommunications will stay with the Centre, local services will be taxed by states. The move was meant to compensate states for the central sales tax.