In a major breather for industry, states have agreed to pare the central sales tax to 2 per cent following the implementation of the value-added tax from April 1.
At present, the Centre levies a 4 per cent sales tax on inter-state traded goods and passes on the proceeds to states.
The empowered committee of state finance ministers, which is responsible for working out the roadmap for value-added tax, today met to finalise the central sales tax rate.
The pending issues of input tax credit on inter-state purchase and the roadmap for the subsequent phase-out of the central sales tax were also taken up in the meeting, officials involved in the exercise said. The decision could reduce prices of several goods produced in one state but sold somewhere else.
Central sales tax makes up for 20-40 per cent of the revenue receipts of most state governments and contributes around Rs 13,000 crore (Rs 130 billion) to the Centre's exchequer.
While the Centre and states have decided to lower the central sales tax to 2 per cent in the first year following the transition to the value-added tax, a decision on lowering the tax in the subsequent years has not been firmed up so far.
The Centre had earlier suggested retaining the central sales tax at 4 per cent in 2003, paring it to 2 per cent in 2004 and then abolishing it in 2005. Subsequently, it was decided to reduce the central sales tax to 2 per cent in the first year, officials said.
However, industry is still worried about the denial of input tax credit on inter-state purchases. This is because the central sales tax paid on inputs sourced across a state's border is not eligible for setoff on the grounds that the revenue flows into another state.
Most of the less developed states specialising in manufacture of intermediate goods could also turn out to be losers if a way is not found to counter the denial of input credit on inter-state purchases. The principles of free trade of goods will also be hit, industry contends.
The decision to finally abolish the central sales tax is necessary to achieve the principles of a destination-based VAT. At present, the central sales tax is levied and collected by the state of origin during an inter-state transaction.
Under the proposed VAT regime, where full tax credit is allowed for locally acquired goods, the existence of non-creditable central sales tax on inter-state purchase of inputs would continue to promote the cascading of tax and, therefore, a decision to phase-out the levy was taken by the Centre and states.