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C. Chandramouli

IN HIS resolve to introduce VAT (value added tax), the Finance Minister, Mr Jaswant Singh, in his Budget speech, announced a reduction in the rates of Central Sales Tax (CST) to 2 per cent and assured that the States would be compensated for the loss that they suffer on account of the reduction.

Who will calculate the revenue loss and how will it be calculated is an issue that is likely to raise a lot of heat and dust. The total revenue from CST in 2001-02 was Rs 10,739.55 crore (Reserve Bank of India Bulletin, January 2002). The real revenue from this source is extremely difficult to calculate for two primary reasons: One, tax evasion and, two, consignment transactions (branch transfer, stock transfer, consignment sales). States have been repeatedly making this point before almost every available forum.

The issue of tax evasion should be taken up by State governments or expert bodies such as the NIPFP. The second issue of consignment sale is taken up for greater scrutiny.

Entry-54 of the State List and Entry 92-A of the Union List, which empower the State and Central governments to levy sales tax, use the term "purchase and sale of goods". The Constitution, however, does not define the word `sale'. Judicial interpretation has clearly laid down that the word sale in the Constitution has to be understood as being the same as that defined in the Sale of Goods Act, 1930. This interpretation gave scope for avoidance of tax in a number of ways. Transactions in the form of consignment transfers, stock and branch transfers were exempt from taxation. Thus, if a dealer in one State transferred his stock to his own branch in another State, he would not have to pay any tax on the transaction, as an element of sale was not involved in this case. Such transferred stock would be liable for tax only when sold and hence would attract only the local tax and not the CST. Registered dealers all over the country have largely employed this provision to their advantage. They have selectively subjected their goods either to CST or local/state tax depending on whichever tax regime was lower. The Gujarat Government's Report of the Taxation Enquiry Commission (1980), estimated the loss of revenue on account of consignment sale to be three times that of the CST yield in groundnuts, and 16 in groundnut oil. Kerala estimated the loss to be four times of what is collected as CST on rubber and 30 times of that collected from tea.

The L. K. Jha Committee also looked into the matter and made some suggestions. However, these were not acceptable to many States, which continued to press for a Constitutional Amendment to enable the taxation of such transactions. Accordingly, the Constitution 46th Amendment was passed in 1982 enabling the levy of Consignment, Tax. The enabling legislation required to implement this amendment is yet to be enacted. Chief ministers and State finance ministers have been deliberating on this issue since then, but are yet to arrive at any consensus. Meanwhile, there continues to be rampant evasion of taxes. An estimate by the Sarkaria Commission in 1988 put the loss on this account at Rs 2,000-4,000 crore. Add to this, inflation and the increase in volume of trade across States and the figure would be a mammoth one. How will the actual loss on account of consignment transactions be calculated is a question that has to be answered.

Some experts have raised an ethical issue that cash compensation would be construed as recognition "that exporting the tax burden to non residents is a legitimate way of raising resources" and should not, therefore, be encouraged.

This argument suffers from a very serious flaw. Dealers across the globe look for the least transaction costs and would opt for the tax regime that would suit them the most. In this situation, they would choose the CST if that were more advantageous and local sales-tax if the latter were to their advantage. Market competition would decide this and, in actuality, the consumer is not put to a loss on this account. If at all the "exporting States'' earn any revenue out of CST it is because the transaction cost (this includes the tax element) in the "importing State" is less favourable than their own. There is no moral issue of exporting tax burden involved here-only market competition and self interest!

Another issue that has the potential to pose problems to a consensus is the argument that the CST regime itself imposes restrictions in the taxing powers of States and is, therefore, causing a huge loss of revenue. States have been arguing that on account of restrictions imposed by the CST Act, they have been losing considerable revenue.

The rationale of the CST was to regulate inter-State trade in commodities and to prevent the prices of these commodities from increasing abnormally. Generally, goods of mass consumption or raw materials should qualify for being declared as essential commodities. In fact, the Taxation Enquiry Commission (1953-54) had recommended the inclusion of only coal, iron and steel, cotton, hides and skins and oil-seeds in this list.

However, the list now contains 13 items. Each of these main items has a large number of sub-items. For instance, the list includes items such as steel tubes, fishplates, bearing plate bars, crossing sleeper and pressed steel sleepers, rails wheels, axles, wheel sets, wire rods, and so on.

These items cannot be termed `essential' by any stretch of imagination. The argument, therefore, is that States have unnecessarily been subjected to loss of revenue on account of the lower rates of tax prescribed under the CST regime.

sThe West Bengal Government, in a memorandum to the Eighth Finance Commission, had argued that the State was losing about Rs 57 crore a year on account of the restrictions imposed by the CST Act. What is the loss and how is it to be calculated?

The Finance Minister has rightly recognised that in a federal set up, consultation with the States is an absolute necessity and has assured that "all the steps would be undertaken only after arriving at a consensus with the Empowered Committee of State Finance Ministers". The road to consensus is likely to be long and keenly contested.

(The author is Director, Census Operations, Tamil Nadu and Pondicherry. The views are personal.)

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