The Hindu Business Line : `CST phaseout timeline difficult'

The Finance Minister, Mr P. Chidambaram, has said that it would be difficult to put a timeline on when the Central Sales Tax (CST) phaseout would start even as he exuded confidence that the Centre and the States would be able to surmount the "knotty" issues.

The Empowered Committee of State Finance Ministers on Value Added Tax (VAT) had announced that the phaseout would begin from October 1, but had made it clear that it was conditional on the States being fully compensated by the Centre for the expected revenue loss from the move .

Annual CST collections during 2005-06 stood at Rs 18,000 crore, which was collected and retained entirely by the States.

The Finance Minister also indicated that the phaseout issue has not been put on the backburner even while pointing out that these are ticklish legacy issues.

"We are in talks. There has been no complete agreement. There are still one or two issues that are outstanding. Unless they are resolved, it will be difficult to give a date when CST phasing out will start. If we reach agreement before October 1, we can start from that date", Mr Chidambaram said, when asked about the timeframe.

He pointed out that State-level VAT has been a "remarkable success" and felt that there was no reason to assume that the Centre and the States won't succeed in CST phaseout.

Differences between the States and the Centre persist on the nitty-gritty of the compensation package for the phaseout. The disagreement is over the type of monetary and non-monetary measures that could form part of the package.

States had demanded devolution of 50 per cent of the Centre's service tax collections, which has been turned down by the Centre.

The Centre had proposed, as part of the compensation package, among other measures, a gradual increase in VAT rates of items under the 4 per cent category to 5 per cent from April 1, 2007 and 6 per cent from April 1, 2008. The States are however of the view that the decision on VAT rates should be left to them and should not be counted in compensation package.

Permanent revenue loss

States have also pointed out that removal of CST would be a permanent revenue loss for them and that compensation package should also factor in the buoyant growth rates in this tax in view of expanding economy and increase in volumes of inter-state trade.

As CST component in tax revenues is high in many States, the CST revenues are crucial for the States and hence there is resistance to its reduction without any adequate compensation.

On its part, industry had highlighted that CST and VAT cannot co-exist in a destination-based VAT regime and sought the removal of the CST at the earliest. The VAT regime does not allow a set-off of the CST levied on inter-state sales. A seller located outside a State in which his products are sold would be at a disadvantage compared to the local supplier.

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