The Hindu Business Line : CST phase-out from April 2004

INDIA Inc may be in for some disappointment. The Finance Ministry has agreed to cut the Central sales tax (CST) to 2 per cent only from April 1, 2004, one year after the proposed implementation of value-added tax (VAT) by States. The levy will be scrapped altogether from April 1, 2006.

The decision to phase out CST, which imposes a 4 per cent tax on all inter-State transactions, in a span of three years beginning April 2004 will facilitate a smooth transition from the existing sales tax system to a value-added tax system, according to Dr Asim Dasgupta, Chairman of the Empowered Committee of State Finance Ministers.

The existing CST rate of 4 per cent would therefore continue in fiscal 2003-04. The impost will be cut to 2 per cent in 2004-05, brought down further to 1 per cent in 2005-06 and scrapped altogether in 2006-07. The phase-out would reduce the burden on the Indian industry. The Centre has already given an assurance to States that it would provide a safety net in the form a compensation mechanism to offset any revenue losses on account of switchover to VAT.

The estimated collection from CST in 2001-02 stood at Rs 10,739.55 crore. Of this, 50 per cent is accounted for by four States — Maharashtra, West Bengal, Tamil Nadu and Haryana.

The domestic industry has been opposing the continuation of CST even after the implementation of VAT as it reckons that CST without a set-off in the VAT system could create distortions, given that several industrial units source their inputs from outside their States.

The Finance Ministry has, however, decided to maintain status quo on the CST rate in the first year of the proposed implementation of VAT.

According to Dr Dasgupta, 22 out of the 28 States have already finalised the proposed VAT legislation and these will be passed by the respective State Assemblies during the winter session.

While a few items will remain exempted from VAT, there will be only two basic rates — 4 per cent and a revenue neutral rate (RNR). Basic necessities, agricultural and industrial inputs will be taxed at 4 per cent. For all other goods, there will be a general VAT, which will have a floor on the RNR at 10 per cent and ceiling at 12.5 per cent. This will be eventually merged into one rate.

Draft proposal for service tax law

THE Finance Ministry has firmed up a Cabinet proposal for a Constitutional amendment that will enable the Centre to levy and collect service tax and assign the proceeds to States.

The draft for a separate service tax legislation has been sent to the Law Ministry for approval, according to the Revenue Secretary, Mr C.S. Rao.

The proposed legislation will help in evolving a co-ordinated system of taxation of goods and services, besides boosting revenues of States, which will switch over to VAT from April 1, 2003.

However, according to current indications, the legislation is expected to be tabled only in the Budget session of Parliament.

Services will be integrated into the VAT system only after April 2004 — one year after the implementation of VAT.

According to Dr Dasgupta, a set-off from services cannot be done in the first year of implementing VAT. "States would like to get the full advantage of VAT in the first year after which services can be integrated into the VAT system."

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