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Centre, States may explore VAT rate hike to offset CST losses

K.R. Srivats

New Delhi , Dec. 18

THE Centre and the States may explore the possibility of a slight increase in certain VAT rates to offset the losses arising from Central sales tax (CST) phase-out.

This was one of the proposals that came up for discussion during the meeting between the VAT panel and the Union Finance Minister, Mr P. Chidambaram, on Friday. However, no final decision has been taken in this regard, official sources said.

Currently, the entire CST is collected and retained by the States. The VAT panel is now seeking full Central compensation of the losses that may arise from CST phase-out.

In its estimate, the CST collections next fiscal are expected to be about Rs 18,000 crore and reduction in CST ceiling rate from four per cent to two per cent from April 1 next year implies that losses to the tune of about Rs 9,000 crore have to be compensated.

It was felt in certain quarters that adjustment in VAT rates could to certain extent help offset the loss from CST phase-out.

"There was some preliminary discussion on whether the existing four per cent could be increased to five per cent or 12.5 per cent to 13.5 per cent. But there is no finality on this area," the sources said.

After meeting the Finance Minister, the VAT Panel Chairman, Dr Asim Dasgupta, said that the Centre has indicated that it is positively inclined to the idea of providing Budgetary support for compensating the CST losses, but wants certain other avenues to be explored side-by-side.

States firm on lobbying for power to tax services

THE States are determined to pursue in the long term their demands for granting them the power to levy tax on services even as they are currently focused on getting more collection powers for this tax.

During his meeting with the Union Finance Minister, Mr P. Chidambaram, the VAT Panel Chairman, Dr Asim Dasgupta, had sought, among other things, bigger service tax collection powers for the States.

"We have not given up on the goal of obtaining powers to levy service tax. For this a Constitutional amendment is required, which takes longer. Longer than what we require for the solutions to our problems. This is a long-term goal. In the current phase, we are focused on getting bigger collections powers," Dr Dasgupta told Business Line.

He was responding to a query on whether States had given up their demands for power to levy tax on services, given that they are now seeking bigger collection powers for this tax.

Currently, the power to levy tax on services is vested with the Central Government (through residuary powers), which also collects this tax. The collected service tax forms part of the divisible pool of Central taxes and on this the Finance Commission-recommended sharing formula is applied.

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