INDIA:Central Sales tax to ZERO FROM 31.3.2010

Delhi, Jan. 8

States have expressed to the Centre their initial reservations over levy of value-added tax (VAT) on textiles and sugar. This is one of the conditions that the States may be required to meet for availing themselves of better compensation from the Centre for the CST revenue loss in 2009-10.

While levy of VAT on sugar may not be appropriate when retail prices of sugar are already high, there may not also be a case for similar levy on textiles, particularly in the current economic downturn, according to the States.

In 2009-10, the Central Sales Tax (CST) revenue loss to the States consequent to the reduction in CST rate to 2 per cent is estimated at Rs 14,000 crore. The Finance Minister, Mr Pranab Mukherjee, on Friday made a new offer to the States towards the CST compensation package for 2009-10.

Of the required compensation of Rs 14,000 crore, the Centre is willing to pass to the States the entire Rs 5,000 crore from the expected service tax collections on agreed list of 33 services. For the remaining Rs 9,000 crore, Mr Mukherjee has suggested that given the slowdown in the economy the States can accept 50 per cent of it, implying that they have to forego the remaining 50 per cent.

However, compensation towards the 50 per cent of the gap will come with conditions like States being required to levy VAT on textiles and sugar, according to the current proposal.

“We (States) have to discuss the CST compensation package. But States have certain views with regard to the conditions connected with it (compensation package)”, Dr Asim Dasgupta, Chairman of the VAT Panel, said after meeting Mr Pranab Mukherjee at North Block today.

Meanwhile, there is no decision yet on the exact date for introduction of goods and services tax (GST). Mr Mukherjee has requested for further discussion with the States before an announcement could be made, Dr Dasgupta said.

The CST ceiling rate was last reduced to 2 per cent from June 1, 2008 as part of roadmap for phase-out of the levy by March 31, 2010. Currently, none of the States levy VAT on sugar and textiles. Many states have levied VAT on tobacco.