Central Sales tax must GO

by SATYA PODDAR PARTNER, ERNST & YOUNG

The Tiny, but Unjust, tax must go

The central sales tax (CST) is the root of many distortions and inefficiencies in the current tax system. It is a tiny tax, but inflicts pain like a chronic migraine. It is unjust, difficult to enforce and prone to evasion. The states pour vast sums of money in setting up inter-state checkposts to enforce the tax, which are a useless fixture, and serve little purpose other than to supplement the incomes of those manning them. The barriers they create are a blot on the common market of India. Being an origin-based tax, CST violates the principle of interjurisdictional equity.

It is an extra-territorial tax by the producing states on the residents of the consuming states. It is also a major contributor to tax cascading as no credit is allowed by any government for the tax paid on inter-state purchase of inputs. The enhanced costs create a competitive disadvantage for the Indian suppliers. To avoid the tax, manufacturers first stock transfer the goods to their own depots in other states and then make a local sale. But that makes the supply chain complex and expensive. In one recent study, an electrical manufacturer had set up 26 distribution centres, which could be reduced to five if CST is abolished.

Despite this, the states want to hang on to the CST only for the revenue consideration. However, the loss in CST revenues can be more than offset by a suitable adjustment in VAT rates, broadening the tax base and enhanced compliance. To illustrate, when CST was reduced from 4% to 2%, the reported inter-state sales in some states (e.g., Delhi) shot up by more than 100%!

Some states have argued that reduced CST creates much larger arbitrage opportunities for the dealers to show intra-state sales (taxable at 4% to 15%) as inter-state sales (taxable at 2%). Such activities can be controlled through ITenabled mechanisms like TINXYS (Trade Information Exchange System) that allow proper reporting and monitoring of inter-state transactions and for collection of tax on them.

TINXYS has already been developed, but it’s accumulating dust on the shelf for want of attention from state bureaucracies. GST can provide an impetus, but is not essential, for the adoption of such technologies.