Post-VAT, states turn to CST

After reworking the value-added tax rates, states are now reducing or doing away with the 4 per cent central sales tax on various products to check trade diversion.

Arunachal Pradesh has abolished the CST. Taking a cue, the Delhi government is considering a proposal to reduce the CST on iron and steel to absorb the impact of the tax being halved to 2 per cent by Punjab and Rajasthan.

"We are in talks with the Punjab and Rajasthan governments. If they don't agree to change their stand, we will also be bound to consider certain reductions to prevent our trade and industry from shifting to other states," a Delhi government official said.

The moves come even as Bharatiya Janata Party-ruled states had cited the continuation of the CST as one reason for not implementing the VAT from April this year.

Sources in the empowered committee said the BJP-ruled states -- Jharkhand, Gujarat, Chhattisgarh, Madhya Pradesh and Rajasthan -- were turning the CST reduction and its phase-out into a political issue as states had powers to bring necessary changes.

The CST is levied by the central government, but collected by state governments. States, however, have the discretionary power to reduce the CST, but this power has not been exercised by many in the past as it would have led to a reduction in state revenue.

The empowered committee on the VAT has agreed to reduce the CST to 2 per cent from April next year and phase it out from April 2007.

States have said the Centre should prepare a clear-cut road map for the phasing out of the CST with an adequate compensation package as a cushion for possible revenue loss.

Some states like Orissa have, however, opposed the empowered committee's proposal to abolish the CST on the grounds that it would lead to price variations between producing and consuming states.