The Hindu Business Line : Paving the way for GST

The Government has finally commenced the phasing out of CST (Central Sales Tax). The Taxation Laws (Amendment) Act, 2007 has been notified and the same has taken effect from April 1. The CST rate for inter-State sale to registered dealers has been reduced from 4 per cent to 3 per cent against Form C with effect from April 1. The move is towards the reduction of CST to 2 per cent in 2008, 1 per cent in 2009 and 0 per cent in 2010 to pave way for the introduction of GST (Goods and Services Tax).

Significant changes

To avoid going to Parliament every time for reduction of CST, Section 8 has been amended to provide for issue of notification for reducing the tax rate. Thus, from next year onwards, the Government will issue notifications for reduction of CST. While CST has been reduced to 3 per cent, there is no change in the position that if the local VAT rate in the State of the selling dealer is less than 3 per cent, then the local rate (2 per cent or 1 per cent) will apply to the inter-State sale transaction with Form C.

There are certain other changes in the CST Act which are of significance. Until March 31, 2007, the CST rate for inter-State sale to persons other than registered dealers (or inter-State sale without Form C) was 10 per cent or the applicable local VAT rate, whichever is higher. Thus, the CST for sale to persons other than registered dealers was generally at a minimum of 10 per cent. The concept of minimum of 10 per cent CST has now been removed. On and from April 1, 2007, the CST for sale to persons other than registered dealers would be equal to the local VAT rate applicable to the goods in the State of the selling dealer which may be either 4 per cent or 12.5 per cent.

Form problem

Collection of one Form C for one year itself was difficult, given the fact that in many States Form C is not issued to the dealers for a variety of reasons. To add to the woes to the industry, in October 2005, the Government amended the CST (Registration and Turnover) Rules, 1957, to make submission of Form C quarterly.

Thus, four Forms for one year for one dealer is the present rule. By the latest amendment from April 1, 2007, the pressure of Form C collection for items attracting 4 per cent VAT would be greatly reduced, as non-collection of Form C would mean 1 per cent extra as compared to 6 per cent earlier.

In all these years, the rate of CST on inter-State sale of goods to government/government departments was 4 per cent or the lower applicable local VAT rate, against issue of Form D. On and from April 1, 2007, there would be no special treatment for inter-State sale to government/government departments as the concept of issue of Form D by the Government has been removed. Also, Section 6(2) of the CST Act has been amended to remove the facility of issue of Form D in an in-transit of sale transaction to the Government.

While, on the one hand, the CST rate reduction is good news to trade and industry, the State Governments are bound to feel the pressure of dip in collection. The Union Government is understood to be working its way towards a broad consensus on compensation to the States. The compensation package may include transfer of entire tax revenue collected from 33 existing services which are considered to be intra-State in nature to the States. There is also a proposal to introduce 44 new services for States, thereby making it a total of 77 services to augment the revenue for the States.

CST collection by States was estimated to be over Rs 25,000 crore for 2007-08 and cut by one percentage point from April 2007 is stated to result in States losing about Rs 6,250 crore. Also, as per the latest figures available, the percentage increase in collection of VAT by States has dropped from to 22 per cent for the period April- February 2007 compared to an increase of over 23 per cent for the same period in 2006.

(The author is a Chennai-based advocate.)