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CST cut to hurt States by Rs 5,000 cr

Our Bureau

NEW DELHI, Feb. 28

THE State Governments stand to lose over Rs 5,000 crore annually from the Union Budget announcement to halve the Central sales tax (CST) rate to two per cent in the coming fiscal.

During 2002-03, total revenue from the CST accruing to States are budgeted at Rs 10,780.69 crore, which includes Rs 2,080 crore for Maharashtra, Rs 1,300 crore for Gujarat, Rs 1,050 crore for Haryana, Rs 958 crore for Tamil Nadu, Rs 921.50 crore for Andhra Pradesh, Rs 849 crore for Karnataka and Rs 636 crore for Madhya Pradesh.

While Mr Singh has said that the Centre will compensate the States for the revenue losses due to the CST rate reduction from four to two per cent, it is not clear though how exactly this would be done. One avenue could be the proposal to empower States to impose sales tax on sugar, textiles and tobacco products at a rate not exceeding four per cent.

Currently, States do not charge any sales tax on these products. Instead, the Centre imposes additional excise duties `in lieu of' sales tax (AED) on the behalf of the States.

Mr Singh has stated that the Centre will continue to levy the AED, which isbudgeted to realise Rs 3,202 crore during 2003-04, against Rs 3,084 in the revised estimates for 2002-03. Further, the Centre will not deny States the additional 1.5 per cent of its all shareable taxes and duties, which they are currently entitled to on account of the Centre levying AED on sugar, textiles and tobacco products.

The power to levy sales tax on these three commodities — through the proposed amendment to the Additional Duties of Excise (Goods of Special Importance), Act, 1957 — will basically confer the States with an additional revenue stream, which will partially offset the losses arising from the CST duty cut. Mr Singh, at the same time, has clarified that both the reduction in CST rate as well the power granted to States to levy sales tax on the three items will be effective only "from a date to be notified'.

The move to allow States to charge sales tax on sugar, textiles and tobacco products — even as the Centre will continue to levy AEDs on these — however, means higher prices for the consumer.

Sugar, for example, attracts a total excise incidence of Rs 85 per quintal, inclusive of a Rs 34 basic excise, a Rs 37 AED and a Rs 14 Sugar Development Fund (SDF) cess. If the States impose a sales tax of four per cent on top of this, it would imply an additional Rs 48-50 per quintal burden on the industry, which will be passed on to consumers.

Mr Singh said that the move to halve the CST rate was necessary to bring in place a `destination-based' value-added tax (VAT) system.

Under the VAT, companies can avail credit on the sales tax paid on inputs, so that their effective tax liability is confined to the `value added' by them in course of manufacture.

Logically speaking, the manufacturer should be compensated not only for the sales tax paid on inputs sourced from within the State, but also for the CST that is levied on inputs sourced from another State.

While the States are not averse to providing tax credit on inputs sourced from within their own State, they are, however, not keen to provide a similar set off on inputs sourced from outside, since the CST proceeds accrue entirely to the exporting State.

And neither is the exporting State amenable to doing away with the CST considering the revenue implications. Caught in between is the manufacturer who is faced with the cascading burden of paying the CST on inputs sourced from outside the State, for which he cannot avail full set-off.

Article E-Mail :: Comment :: Syndication

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