Govt to bear states' entire sales tax cut burden

NEW DELHI: The Centre has decided to grant 100% compensation to states for the revenue loss arising from the proposed reduction in central sales tax. The compensation, promised for the first two years (''03-04 and ''04-05), will be reviewed in December ''05.
This is in addition to the 100% reimbursement promised to states for the first year of their transition to the value added tax regime. The base year for working out the compensation is ''00-01 for sales tax revenues in general while, in the case of CST, compensation will be worked out in proportion to revenues actually collected under this head in ''03-04.
Finance minister Jaswant Singh has announced that the existing CST of 4% would be cut to 2% this fiscal so as to facilitate stability in the VAT regime. Around 18 states are expected to switch over from the existing sales tax system to VAT by April 1.
Draft VAT legislation of most states are pending with the Centre, awaiting the president''s approval. Thus, states'' ability to switch to VAT starting next fiscal depends on the central government.
The bills have to be finally cleared by the home ministry division that deals with Centre-state relations. If the ministry delays clearance, states may be unable to kick off VAT as planned.
The CST rate could be pruned to 1% in ''04-05 and phased out the following year, although a final view is yet to emerge on complete removal of CST. According to official estimates, a 50% cut in CST rate would translate into a revenue loss of 35%.
The ''02-03 revenue realisation from CST is budgeted at Rs 10,780 crore for all states, as against a revised estimate of Rs 9,478 crore in ''01-02. If the 2% CST rate had come into effect in ''02-03, the compensation would have worked out to Rs 3,773 crore.
The compensation for CST reduction comes on top of the reimbursement to be given to states on revenue losses arising on account of the switch from the existing sales tax system to VAT.
States would be given 100% compensation in the first year, 75% in the second year and 50% in the third year. This apart, states would also be entitled to a share of the proceeds from service tax after the passage of a separate service tax legislation.
States, on their part, have agreed to remove multiple levies — entry tax, purchase tax, turnover tax — with the introduction of VAT. A uniform revenue neutral rate of 12.5% will be levied on close to 200 items. A 4% tax would be levied on essential goods and industrial inputs.
While petrol will have a floor rate of 20%, naphtha, LNG, CNG and LPG will attract 4% levy when used as industrial inputs.
The existing sales tax structure increases the tax burden of a commodity by taxing both input and output. VAT is expected to bring down the tax burden as a set-off would be available on the tax paid on inputs.
A study done by the government of Karnataka shows that the transition to VAT will not result in an increase in retail commodity prices.