The Hindu Business Line : `For CST phase-out, all States should adopt VAT'

Admitting that the Central sales tax (CST) phaseout was turning out be a ticklish issue, Dr Parthasarathi Shome, Advisor to the Union Finance Minister, on Monday said that it would be very difficult to abolish or even reduce CST, if all States do not adopt value added tax (VAT).

Two States — Tamil Nadu and Uttar Pradesh — and the Union Territory of Pondicherry are yet to adopt VAT.

Addressing an Assocham meeting, Dr Shome also highlighted another complication in abolishing or reducing CST. In the absence of a credible IT-based information system, there will always be a tendency to inflate inter-State trade, Dr Shome said. He added that this tendency would get a fillip if the CST rate was reduced and the IT system was not in place.

"We are still in battle on the CST front.

"It only shows that the CST component in tax revenues is very high and crucial for the States. It is not very easy to remove CST or even decrease it in the wake of constraints and reservations," he said.

Talks are on

At the same time, Dr Shome also made it clear that the CST phase-out issue has not been put on the backburner. "Talks are still on with regard to CST compensation at the level of the sub-committee of the Empowered Committee. Expert advisors from the Union Finance Ministry are also participating in the deliberations. The sub-committee will submit a report to the Empowered Committee," he said.

Dr Shome expressed hope that Tamil Nadu would implement State-level VAT after the Assembly elections. As regards Uttar Pradesh, he said that the State was still in the process of convincing its traders about the merits of VAT. "They are not opposed to VAT," he said.

Annual CST collections stood at about Rs 18,000 crore. The ceiling rate on CST stands at 4 per cent.

Both the Centre and the States are yet to come to an agreement on the compensation package for CST phaseout. Industry wants CST to go, as it cannot co-exist under a VAT regime.

Goods, services tax

On the goods and services tax (GST), Dr Shome said that the structure of this tax has to be agreed upon and some constitutional reforms may be required. The Finance Minister, Mr P. Chidambaram, had in his budget speech of 2006-07 set 2010 as the target for introduction of GST.

Dr Shome released an Assocham-KPMG study on State-level VAT, which recommended that steps be expedited to introduce GST much earlier than 2010.