The Hindu Business Line : CST phase-out deferred to April

The much-awaited phase out of Central Sales Tax (CST), which is a tax on inter-State sales of goods, would now begin from April 1, 2007, against the earlier planned date of October 1 this year.

The move to put off the starting date of the CST phase out by six months might irk trade and industry, which has been making a case for early removal of CST.

The VAT Panel on Saturday took a view that the phase-out would begin from April 1, 2007, with a reduction in CST ceiling rate from 4 per cent to 2 per cent and not 4-3-2 as planned earlier. The move to defer the phase came in the wake of lack of "convergence" between the States and the Centre over the elements of the compensation package for CST phase out.

"The CST phase-out would exactly be the same as the previously planned schedule except that the six-month reduction from 4 to 3 (from October 1, 2006 to March 31, 2007) would not take place. After reducing the rate from 4 to 2, the review would happen as planned by December 2007," Dr Asim Dasgupta, Chairman of the Empowered Committee on VAT, told newspersons after a meeting here on Saturday.

Dr Dasgupta said that the senior officials of the empowered committee and the Union Finance Ministry would together rework the compensation package.

"We (the Union Finance Ministry and the States) want to converge as soon as we can and certainly not beyond December 31, 2006," Dr Dasgupta said even as he declined to go into the issues that prevented them to converge by the earlier set date of October 1.

He maintained that the empowered committee "strongly" held the view that CST and VAT cannot co-exist and that CST had to be phased out.

"But this (phasing out) is subject to full compensation package for loss of revenues on account of CST phaseout to be agreed upon by the Union Finance Ministry," he said.

The VAT Panel had earlier announced that the CST phaseout would begin from October 1 with a reduction in ceiling rate from 4 to 3 per cent, followed by 3 to 2 per cent on April 1, 2007, then a review by December 2007, reduction from 2 to 1 in April 2008 and then from 1to 0 in the subsequent year.

This roadmap was acceptable so long as the Centre gave full compensation on the expected loss of revenue to the States from CST phaseout.

The annual CST collection in 2006-07 is expected to be Rs 20,000 crore and growing at an average 18 per cent over the last three years.

Currently, the entire CST is collected and retained by the States.

Meanwhile, Dr Dasgupta also said that revenues of VAT-implementing States grew by 26 per cent in April-August.

"If we take the 21 States that were there in the previous year, so that we can compare on a point-to-point basis, the rate of growth of VAT revenues has been 30 per cent," he said.

Dr Dasgupta also said that the deviations in VAT rates have been reduced further to 2 per cent of all commodities in the VAT system (about 700 items). He said that the deviations are mainly seen in socially sensitive items such as fertilisers and sometimes in diesel.