The official panel on value added tax decided on Thursday to ask the Centre to cut Central Sales Tax, imposed on inter-state movement in goods, to three per cent from the current four per cent from October subject to a package for compensating states for the resultant revenue loss.
For meeting the revenue loss, that will amount to around Rs 2,500 crore (Rs 25 billion) for the second half of the this fiscal, the Empowered Committee of state finance ministers demanded increase in states share in devolution of services tax from 30.5 per cent to 50 per cent and power for them to impose tax on 68 services of intra-state nature.
The committee demanded some more services under the states tax net, imposition of VAT on imports and on sugar, textile and tobacco, which are under additional excise duty, from April 1, 2007, panel Chairman Asim Dasgupta told reporters in New Delhi.
The CST, if the finance ministry agrees, will be further reduced by one per cent point each in the next three years to remove it altogether by 2009-10.
However, there would be a review of the schedule during 2008-09, Dasgupta said.
He, however, made it clear that the Empowered Committee's proposal to cut CST is subject to finance ministry agreeing to the package.
The Empowered Committee, in fact, endorsed the recommendations of a working group comprising sales tax commissioners and others on roadmap for CST reduction and compensation package.
Dasgupta did not disclose the services which states want to tax, but clarified that it would not require constitutional amendement as it has already been done but not notified.
Currently, there are 96 services taxed by the Centre at the rate of 12 per cent.
However, imposition of VAT on imports would require constitutional amendment, he said, the proposed levy is WTO-compliant.
The VAT on imports, if allowed, would be implemented with the help of customs authorities, Dasgupta said. "Customs authorities will collect the tax and deposit in the credit of the VAT destination state," he added.
Asked whether CST reduction would be carried out if compensation to states is provided in piecemeal, he said it has to be packaged.
CST was earlier scheduled to be phased out by two per cent this year and completely eliminated next fiscal. However, pursuant to huge amount of compensation to states for meeting revenue loss, it was decided to phase it out in four years instead of two years.
An amount of Rs 17,000 crore (Rs 170 billion) was collected from CST last fiscal, Dasgupta said.
Dasgupta said proposals would be immediately sent to the finance ministry. He would meet Finance Minister P Chidambaram before the next VAT meeting, some time in the middle of next month, to discuss the matter with him, he said.
On CST, Chidambaram had said in his budget speech for 2006-07, "Once the Empowered Committee and the government reach an agreement, I shall return to the house with firm proposals, including legislative changes and a supplementary demand."
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