Govt plans to phase out ST in 4 years

NEW DELHI: Setting the pace for smooth transition to the value added tax (VAT) regime, the government will be reducing central sales tax (CST) to 2% in the second year of implementation of VAT and abolish it altogether within 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 said that phasing out CST - which imposes a four per cent tax on all inter-state transactions - will do away with distortions created in the current system of sales tax.
There will be only two basic rates of VAT. While some essential commodities, declared goods and basic inputs will be taxed at four per cent, for all other goods there will be a general VAT rate, which will have a floor of 10 per cent.
The actual rate will be fixed by the respective state, depending on the revenue neutral rate (RNR) of that particular state, and will not exceed the upper ceiling fixed at 12.5 per cent according to 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 per cent,� said Mr Dasgupta.
Value added tax is proposed to be introduced instead of existing sales tax in most states. The states are expected to switch over to new VAT system 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 value added tax 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 value added tax, but will not be eligible for input tax credit. “However all other goods will get the benefit of input tax credit,� said Mr Dasgupta.
While gold, silver, precious and semi-precious stones will have a VAT rate of one per cent, liquor will have a higher value added tax rate with a floor of 20 per cent.
There are, however, some goods, which are likely to be exempted from the value added tax rate.
These include natural and unprocessed products like earthen pots and betel leaves, items which are legally barred from taxation on sale such as newspaper and national flag and items which have social implications such as books and periodicals.
Also goods of basic necessities such as 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 four per cent.
It is expected that the new VAT regime is expected to eliminate the cascading effect of existing sales tax system by setting off the tax paid at every stage of sales.