The Hindu Business Line : CST replacement therapy

The Finance Ministry needs to take a quick view on how the States need to be compensated if they are to agree to the abolition of the Central Sales Tax (CST). The roadmap for the implementation by the States of a full-fledged Value Added Tax (VAT) system requires that the CST phase-out begin by the next fiscal. It needs no reiteration that a tax on inter-State commerce levied by the State originating it has no place in the scheme of taxation of the value added in successive stages of commerce which is what VAT is all about. By its very nature VAT is a tax on ultimate consumption rather than a levy at the point of origination. The question assumes greater urgency with all but one State agreeing to implement VAT. While the abolition of CST may have its conceptual merits, the reality of the significant role that collections under this head plays for most if not all the States cannot be ignored either. So, the States' acquiescence to any structural reform of the CST regime without an adequate compensation mechanism can be virtually ruled out.

The States' demand for the right to taxation of services or that of greater freedom to tax goods that are considered nationally important and hence currently subject to certain legislative caveats by the Centre, is reasonable and must be seriously considered. Moreover, if the country is committed to moving towards a unified goods and services tax regime, as the Finance Minister has promised, then powers of taxation have to move from the Centre to the States rather than the other way about. It is difficult to see the States fulfilling their development commitments with only the stamp duty on property transactions and a tax on alcohol if they are to surrender their right to commodity taxation. On the other hand, for services such as on-line stock broking or asset management, which can easily be rendered from anywhere in the country, a central mechanism of assessment and collection is more efficient as it would curb tax evasion through arbitrage. Similarly, telecom/Internet services are better suited for a central tax as the digital signals move in utter disregard of boundaries. Assessing the value applicable to a geographical area for tax purposes is fraught with legal complications.

Then there is also the argument that keeping a federal nation-state going as a functioning entity in a situation of vast regional and social disparities means that thw Centre must enjoy greater latitude in the matter of taxation. The maladministration, relative to that of the Centre, that is prevailing in some of the States only strengthens the case for leaving States with limited powers of taxation. But a balance needs to be struck in the larger interest of securing an efficient value added tax regime.