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States want tax divisible pool share untouched

December, 26th 2006

VAT on additional excise duty items

States have urged the Central Government to maintain their existing share in the net proceeds of shareable central taxes if and when they are granted powers to levy value-added tax (VAT) on certain additional excise duty (AED) items such as tobacco.

There are indications that the Centre may as part of the compensation package for Central sales tax (CST) phaseout, allow States to levy VAT on tobacco.

Currently, the 12th Finance Commission's tax devolution formula allows States to get 30.5 per cent share in the net proceeds of sharable Central taxes. States now apprehend that this share may get reduced to 29.5 per cent. This is because the Commission had said that the share in divisible pool should be reduced to 29.5 per cent if the States were to get powers to levy VAT on textiles, sugar and tobacco.

States might lose little over Rs 4,000 crore of tax devolution in 2006-07 if the share were to be reduced to 29.5 per cent from 30.5 per cent. Official sources said that the need to continue with 30.5 per cent share was a pre-condition from the States for any agreement on CST compensation.

States are looking for powers to levy VAT on certain AED items such as tobacco and are counting this measure as part of the proposed package for CST compensation.

The ceiling rate on CST, which is a tax on inter-state sale of goods, is to be reduced from 4 per cent to 3 per cent from April 1 next year if an agreement is reached on the compensation package between the Centre and the States.

While recommending that the share of the States in the net proceeds of sharable central taxes be raised from 29.5 per cent to 30.5 per cent, the 12th Finance Commission had, in its report, suggested that AED in lieu of sales tax on textile, tobacco and sugar be treated as part of the general pool of central taxes.

The Chairman of the Empowered Committee of State Finance Ministers on VAT, Dr Asim Dasgupta, and the Union Finance Minister, Mr P. Chidambaram, are slated to meet on January 3 to take forward the discussions on the CST compensation package.