CST ouster charted, cut to 2% in 2nd VAT year

NEW DELHI: Setting the pace for smooth transition to the value-added tax regime, the government will be reducing the central sales tax to 2% in the second year of implementation of VAT and abolish it altogether in the fourth year of switching over to VAT.
Speaking at an international tax conference organised by FICCI, the convenor of empowered committee of state finance ministers on VAT and the finance minister of West Bengal Asim Dasgupta pointed out that phasing out CST — which imposes a 4% tax on all inter-state transactions — will do away with the distortions created in the current system of sales tax.
There will be only two basic rates of VAT. While some of the essential commodities, declared goods and basic inputs will be taxed at 4%, for all other goods there will be a general VAT rate, which will have a floor of 10%.
The actual rate will be fixed by the respective state, depending on the revenue neutral rate of that particular state, and will not exceed the upper ceiling fixed at 12.5% as per consensus among states. "We are trying to achieve a single RNR but as of now the consensus is 10% floor rate with an upper ceiling of 12.5%," said Dasgupta.
VAT is proposed to be introduced instead of the existing sales tax in majority of states. The states are expected to switch over to the new VAT regime from April 1, 2003. "Out of the 28 states, 22 have already drafted VAT legislations. These legislations are expected to be passed in the winter session of state assemblies, and not wait for the budgetary sessions," said Mr Dasgupta.
The VAT liability will be calculated by deducting input tax credit from tax collected by the dealer during the payment period. Mr Dasgupta added that a few items like petrol, diesel and aviation turbine fuel will be taxed under VAT, but will not be eligible for input tax credit. "However all other goods will get benefit of input tax credit," said Mr Dasgupta.
While gold, silver, precious and semi-precious stones will have a VAT rate of 1%, liquor will have a higher VAT rate with a floor of 20%. Goods like bulk drugs, industrial and agricultural inputs such as printing ink and seeds, declared goods such as iron and steel and capital goods are proposed to be taxed at 4%.