NEW DELHI: The central government is withdrawing a tax break for public sector undertakings (PSUs) that will make their out of state purchases a lot more expensive.
Effective 1 April, departments such as railways and defence will no longer be eligible for the 4% concessional duty on purchases made from outside the state from where the transaction originated. They will instead have to pay 10%, or the normal tax on the item, whichever is higher, a revenue department official said.
The finance ministry is set to amend the Central Sales Tax Act, 1956, in the forthcoming Union Budget to be presented on 28 February. Under the proposed amendment, the central sales tax (CST) will be reduced from 4% to 3% and Form D, which allows government departments to pay concessional duty of 4% on inter-state purchases, will be withdrawn.
The amendments are part of the road map to implement a general goods and service tax (GST) by 2009-10, as opposed to the present system, wherein there are multiple taxes—a central excise, a CST and value-added tax (Vat) at the state level.
The CST is a tax imposed by the Centre on inter-state sale or purchase of goods. Though the tax is imposed by the central government, the proceeds are given to the states. States are estimated to have earned Rs20,268 crore in fiscal 2006-07 under this head. Withdrawal of Form D is expected to help states earn more Vat. As per finance ministry estimates, states could earn as much as an additional Rs2,000 crore next fiscal.
States such as Delhi, which houses nearly all the central government departments, is expected to gain the most. At present, several government departments located in Delhi make their purchases outside, since they do not want to pay a higher Vat of 12.5% on a particular item. Making an inter-state purchase through Form D requires them to pay just 4% duty. Once this incentive goes, departments are expected to resort to making local purchases.
The finance ministry has estimated that implementation of the compensation package for reduction of CST will give states additional revenue of Rs6,500 crore in 2007-08.
Some of the other components of the compensation package that will become effective from 1 April include bringing tobacco under Vat. The item, which earlier attracted an additional excise duty is expected to attract 12.5% Vat. The move will garner an additional Rs2,000 crore.
States have also agreed to tax some intra-state services. This would include 33 services, which are already under the tax net, and 44 new services, such as legal services, education and health, hotel and restaurants, electricity transmission and distribution, and entertainment services.
The 33 existing services, which already attract service tax, include mandap services, commission agents, rent-a-cab services, real estate agents and security services. The legal services proposed to be included would not cover legal services availed by companies. The finance ministry has estimated that these 77 services would garner Rs5,000 crore in taxes.