Hike VAT to stop CST phase-out loss

The finance ministry has projected that states will not suffer any revenue loss due to the phasing out of central sales tax from October 1 this year, barring around Rs 630 crore (Rs 6.3 billion) in the current fiscal, provided they implement certain measures under value added tax.

These include, hiking the rate from 4 per cent to 6 per cent over the next two years, introducing 5 per cent VAT on sugar, textiles, iron and steel and 12.5 per cent VAT on tobacco products from April 1, 2007.

The ministry, in response to the central sales tax compensation package suggested by the states, has said that the total CST loss from 2006-07 up to 2009-10 will come to around Rs 62,100 crore (Rs 621 billion) while additional revenue to states from the measures suggested by the ministry will help generate over Rs 69,000 crore (Rs 690 billion) during the four-year period.

According to the ministry's calculation, revision of the VAT rate from 4 per cent to 6 per cent over the next two years would generate additional revenue of around Rs 36,000 crore (Rs 360 billion).

The VAT on textiles, sugar and tobacco would generate Rs 13,800 crore (Rs 138 billion), abolition of Forms C and D (covering inter-state sales for specific sectors) would generate Rs 14,800 crore (Rs 148 billion) while pruning the declared-goods list would generate an additional Rs 4,000 crore (Rs 40 billion).

Then, each year the loss on account of CST phase-out is less than the additional revenue projected, barring for the current fiscal, in which CST loss is expected to be around Rs 2,500 crore (Rs 25 billion) while revenue mop-up has been projected at Rs 1,900 crore (Rs 19 billion), leaving a deficit of around Rs 630 crore.

The suggestions of the finance ministry will now be examined by the states and discussed at the next empowered committee meeting on August 19 in Kerala.

Some of the possible non-monetary measures suggested by North Block include, bringing the three items that attract additional excise duty, under VAT.

Sugar and textiles could be brought under the VAT ambit at 5 per cent in April 2007 and at 6 per cent in April 2008. Tobacco could be taxed at 12.5 per cent. Further, the 1 per cent devolution to states from the divisible pool on account of additional excise duty could be discontinued.

Similarly, it has suggested that iron and steel be removed from the declared-goods list and taxed at 5 per cent in April 2007, at 6 per cent in April 2008 and at 12.5 per cent from April 2009.

According to the ministry, every 1-per cent increase in the tax rate on iron and steel would yield additional revenue of Rs 850 crore (Rs 8.5 billion).