New Delhi: The fate of planned reduction in Centre Sales Tax by one per cent from this fiscal hangs in balance with the impasse between union and state governments over the compensation for revenue loss to states continuing.
Already one and a half months of this fiscal are over, but CST reduction from three per cent to two per cent is yet to take place due to continued stalemate between the Centre and states, sources said today.
The CST cut is not likely to be introduced with retrospective effect from April 1, 2008, VAT Committee Chairman Asim Dasgupta had said earlier.
While the Centre insists that state governments keep up the promise given by their finance ministers to increase the VAT rate from four to five per cent,and impose VAT on textiles from this fiscal, states are not ready for it.
States attribute their decision not to go for VAT rate hike to high inflation, which has reached 7.83 per cent.
They also say if the Centre agrees to impose VAT on import, the revenue loss to state governments from CST reduction would be partly compensated and the burden on union government to provide relief to states would come down, the sources added.
Imposing VAT on import is another item of the package agreed by the Centre and states, but yet to be implemented. However, the proposal is not easy to put into place, because it would certainly be challenged in WTO, the sources said.
Besides, it would also make it difficult for the Centre to impose countervailing duty, so essential for level-playing field between domestic and foreign players, they said.
The official VAT panel, after its meeting in Thiruvananthapuram early this month, has conveyed its stand against raising the rate to 5 per cent and imposing VAT on textiles, and the Centre is expected to give its reply shortly, the sources added.
The committee had conveyed similar views to the Finance Ministry after its meeting in Delhi last month.
CST is imposed on inter-state sale of goods and is scheduled to be phased out on April 1, 2010, when Goods and Services Tax (GST) is to be introduced. The rate of CST was cut from four to three per cent from last fiscal and is scheduled to be cut to two per cent from this fiscal.
Finance Minister P Chidambaram had stated in the budget for this fiscal, “It is now proposed to reduce the (CST) rate to 2 per cent from April 1, 2008. Consultations are underway on the compensation for losses, if any, and once agreement is reached the new rate will be notified.”
The Centre has already released Rs 2,200 crore to states as part of the compensation for revenue loss due to cut in CST from four to three per cent for some months in 2007-08. The full year compensation has not been given yet.
Making this figure as the base for their estimate, states are now insisting that the actual revenue loss in this fiscal would also be less and the Centre would not have to give much budgetary support, even if states do not increase the VAT rate or impose VAT on textiles, the sources said.
However, revenue loss to states may be in the region of Rs 7,000-8,000 crore for last fiscal, Rs 3,000 crore of which would be met through imposition of VAT on tobacco and on inter-state purchases by government departments.
This fiscal, revenue losses would be much larger at around Rs 15,000 crore, of which Rs 6,000 crore could be met if states agree to increase VAT to five per cent and Rs 1,000 crore if VAT of four per cent on textiles is imposed and Rs 3,000 crore if it is levied at 12 per cent, sources added.