Central sales tax is all set to be phased out over next three years following the government's decision to introduce a single 12.5 per cent value added tax (VAT) from April 1, 2003.
As a first step towards phasing out central sales tax, Finance Minister Jaswant Singh is expected to slash the rate to 3 per cent from the prevailing 4 per cent. The roadmap for phasing out central sales tax, according to sources, will be laid out in the budget for 2003-04.
Sources said that phasing out central sales tax is being linked to compensation payable to states which may lose revenue with VAT becoming operational in the next fiscal.
In effect, the central government does not propose to dip into its own revenues from customs and excise duties to compensate the states. Instead, CST accruals would offset the revenue losses for states.
The central government is expected to garner about Rs 20,000 crore in 2002-03 by way of central sales tax levied at 4 per cent. The sources said that with the proposed reduction of CST to 3 per cent, accruals may dip to Rs 1,5000 to Rs 16,000 crore in the next fiscal.
The cabinet has already decided to provide 100 per cent compensation to states losing revenue with introduction of a single rate VAT during the first year.
As per the proposed roadmap, the compensation would be scaled down to 75 per cent in the second year while central sales tax would also be further reduced to two per cent in 2004-05.
In the following year, CST would be pegged at two per cent while the revenue loss reimbursement would be 50 per cent.
In three years from now, the government will neither levy any CST nor any compensation be paid to states due to possible revenue loss against VAT.
The government has already committed itself to phasing out central sales tax as it would be against the very concept of a tax based on value addition. Currently, CST is being levied on interstate business transactions. The Kelkar committee's recommendations for phasing out central sales tax over four years, has, in effect, been pruned to three years. Further, the committee’s recommendation to increase service tax to offset the states' revenue losses may be dumped.
Retaining central sales tax over the next three years would also come in handy for the finance minister as the revenue losses of states during the first three years may be much lower than the accruals through central sales tax.
A majority of states have already agreed to introduced a single rate VAT though the main opposition party, the Congress, has some reservations.
Veering around the Congress’ objections is important as that party is in power in over a dozen states.
Last week, at a meeting of the Parliamentary Consultative Committee attached to the finance ministry, senior Congress leader Manmohan Singh apparently blasted Jaswant Singh for "inadequate preparation" for introducing VAT from April 1 this year.