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VAT: States told to consider options on Central sales tax

K.R. Srivats

The proposal to retain the 4 per cent CST in the first year is in sharp contrast to the earlier thinking in the Finance Ministry that the first year of VAT implementation should see some cut in the CST rate.


The Finance Minister, Mr P. Chidambaram, flanked by the West Bengal Finance Minister, Mr Asim Dasgupta, and the Minister of State for Finance, Mr S.S. Palanimanickam, at the meeting of the Empowered Committee of State Finance Ministers in the Capital on Thursday. - Kamal Narang

New Delhi , Sept. 23

THE Union Finance Minister, Mr P. Chidambaram, today asked the States to deliberate on the feasibility and impact of continuing with the 4 per cent central sales tax (CST) in the first year of implementation of value added tax (VAT) regime from April 1, 2005.

As per this proposal, the CST would be cut to 2 per cent in the second year and abolished in the third year of VAT implementation. CST collections are estimated to be around Rs 13,000 crore a year.

"The Finance Minister has given us two main proposals. One is to continue with 4 per cent CST in the first year of VAT implementation, 2 per cent in the second year and complete abolition in the third year. Alternatively, there is also a proposal of 2 per cent in the first year and zero in the second year. His heart seems to be closer to the first proposal", sources, who attended the meeting of the Empowered Committee of State Finance Ministers on VAT, told Business Line here.

The proposal to retain the 4 per cent CST in the first year is in sharp contrast to the earlier thinking in the Finance Ministry that the first year of VAT implementation should see some cut in the CST rate.

Meanwhile, State Governments' attempt to bolster its revenues by obtaining the right to levy tax on services is facing resistance from the Centre.

Currently, the Centre alone has the right to levy tax on services.

Informed sources said that the Finance Minister is not particularly enthused about the idea of going in for a constitutional amendment to confer the right to levy tax on services with the States.

He is understood to have told the State Finance Ministers that a constitutional amendment for this purpose (power to levy service tax) may not be all that easy.

He has held that the numbers with the ruling alliance in Parliament are not conducive for a constitutional amendment.

To debate on the issue of States' demand on service tax and its implications on the VAT compensation package, the Finance Minister intends to convene another separate meeting of State Finance Ministers in the coming months.

The 12th Finance Commission is also likely to submit its report to the Centre within the next few months.

Indications are that the Commission would make some recommendations on the issue of service tax and the extent of devolution to the States.

Sources said that the recommendations would also be factored in before the Centre decides upon the future course of action.

Until the issue on service tax comes to finality, States have been assured that they would continue to get 28 per cent of the service tax collected by the Centre.

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