State FMs, Centre inch closer to blueprint for reducing CST
August, 25th 2006
The time table for the reduction in central sales tax from 4% to 3% is on schedule with the empowered committee of state finance ministers and the Centre moving closer to convergence on a compensation package.
We are closer to convergence, but there are still issues. We are trying hard to converge. I am confident that it (reduction in CST rate from October 1) can be done if an appropriate compensation package is agreed upon by the Centre, Asim Das Gupta, West Bengal finance minister and chairperson of the empowered committee said after a meeting with finance minister P Chidambaram. He said the committee of joint secretary to the value-added tax panel and economic advisor to finance minister Parthasarathi Shome will look into the remaining issues and work out the details with regard to the compensation package. The committee will give its report in 7 days.
He said if there is an agreement on the package, then the phase out was implementable. Indirect tax expert Rajeev Dimri of BMR & Co said even if the empowered committee manages to agree on a CST phase out schedule by early September, there should be no problem in implementing it from October 1. He said industry usually works on a lag time of 3-5 weeks for its inter-state supply chain, so it can incorporate the changes. However any further delay can create uncertainty for trade.
States would lose Rs 2,500 crore in revenue this fiscal with the reduction in CST from 4% to 3% from October 1, while the loss next financial year would be around Rs 12,000 crore, he said. Mr Das Gupta said the compensation package should have both a mix of both budgetary and non-budgetary support measures.
States have sought a higher 50% devolution of service tax proceeds as against 29.5% at present. As an alternative, states want Centre to allow them to tax service like financial services and telecom services. States also want VAT on imports as is prevalent in other countries.
The Centre, on its part, has suggest services like legal services, educational services, cleaning services as a part of compensation which are not acceptable to states. Centre has also suggested to states a hike in VAT from 4% to 6%. States impose a 4% VAT on industrial intermediates.
Asked about some states like Kerala imposing a higher rate of 20% on luxury items, he said states had been asked to stick to the rates agreed by the empowered committee. However, he said a deviation in the rate was limited to 20 items out of the 700 under the VAT regime.