The Hindu Business Line : States to seek higher share of VAT pie

Phase-out roadmap
The CST rate would be reduced from 4 to 3 per cent from October 1, 2006 if the Centre agrees upon the entire compensation package.
Beginning April 1, 2007, the CST rate would be cut from three per cent to 2 per cent, from 2 per cent to 1 per cent in the next financial year and finally from 1 per cent to zero per cent in the subsequent year.

New Delhi , May 25

A higher devolution of service tax collections, powers to levy and collect service tax on 68 services, entire proceeds of value-added tax (VAT) on imports, powers to levy VAT on three additional excise duty (AED) items forms part of a compensation package that States will seek from the Centre for phase out of Central Sales Tax (CST).

CST, as of now, accounts for about Rs 18,000 crore annually, which the States collect and retain.

The Empowered Committee of State Finance Ministers on VAT has now endorsed a technical committee's report that specifies the compensation package required by the States for CST phase out.

This report would be forwarded to the Union Finance Ministry, the Chairman of the Empowered Committee, Dr Asim Dasgupta, told presspersons here on Thursday.

Elaborating on the CST phaseout roadmap, Dr Dasgupta said that the CST rate would be reduced from 4 to 3 per cent from October 1, 2006 if the Centre agrees upon the entire compensation package.

The roadmap proposes that beginning April 1, 2007, the CST rate would be cut from three per cent to 2 per cent, from 2 per cent to 1 per cent in the next financial year and finally from 1 per cent to zero per cent in the subsequent year.

"There will understandably be a review after the second year when CST rate is reduced from 4 to 2 per cent," Dr Dasgupta said.

Explaining the features of the compensation package recommended by the technical committee, Dr Dasgupta said the States want a higher devolution of the service tax collections made by the Centre. As against the existing 30.5 per cent devolving on the States through the Finance Commission recommendations, the VAT Panel wants 50 per cent of the service tax collections to be distributed to the States.

"While 30.5 per cent could be distributed among the States as 12th Finance Commission formula, the remaining 19.5 per cent would be towards CST loss for the concerned States," he said.

In addition to the higher devolution, the VAT Panel has identified 68 services of intra-State nature on which the States want the power of taxation and also 100 per cent retention of the collection.

"We want the power to tax these 68 services of intra-State nature as we feel that States are better equipped. I cannot divulge the names of these services now," Dr Dasgupta said. Currently, the Centre alone has the power to tax services.

Apart from the identified 68 services, the VAT Panel is also in talks with Union Finance Ministry on "certain additional services" that may be taxed by the State governments and retained by the States.

The other segments of the VAT compensation package include the issue of VAT on imports and VAT on three additional items of sugar, textiles and tobacco (from April 1,2007). Dr Dasgupta said that VAT on imports would have to be collected by the Customs authorities and given to the destination State. He also said that a constitutional amendment would be required for introduction of VAT on imports.

"If there is any gap in CST revenue loss even after all these measures specified in the compensation package, then this gap has to be budget funded," Dr Dasgupta said.