Shome: Time issues

New Delhi, May 8: The Centre today said there might be a delay in phasing out the central sales tax (CST) in states. It first wants to resolve the issue of compensating the states for the loss of revenue suffered because of a switch to the value-added tax (VAT) regime.

Parthasarathi Shome, adviser to the finance minister, said until the Centre and states resolved the compensation issue, it would be difficult to say by when the CST would be reduced and subsequently phased out.

?The abolition or even reduction of the CST would be difficult unless all the states come under the value-added tax system. A transparent system of information on inter-state trade needs to be put in place before the CST is reduced or abolished,? said Shome.

The government is developing a system called Tin-X-Sys (tax information network exchange system) to provide complete information on inter-state trade, he said.

?The question of how states would be compensated has not yet been decided and talks are on,? he said.

The Centre has compensated states? losses worth Rs 3,000 crore on account of VAT implementation by March 31, 2006, Shome said after releasing a joint study by Assocham and KPMG on Implementation of State VAT ? Early Experiences.

The study has called for the introduction of goods and service tax earlier than 2010 as envisaged by the finance minister. It has also sought consolidation of goods and service tax at all levels and bring them under a single goods and service tax. The study said tax on services is currently imposed through the Finance Act, 1994. A wide variety of services fall under the tax net.

?The apparent dilemma of the Centre is whether states should be given the authority to collect and retain tax on all services or should it be only on identified ones,? the study said.

According to Bhavana Doshi, partner, BSR & Co, sectors that faced maximum difficulties and were worst hit in the run-up to the VAT were those where the rate of sales tax were higher compared with the standard VAT rate of 12.5 per cent. Sectors with a long distribution chain like pharmaceuticals and fast moving consumer goods also faced problems.

The average rate of sales tax was 7.7 per cent and more than 15 per cent for pharmaceutical products and fast moving consumer goods, respectively. The state VAT rate for these products is 4 per cent and 12.5 per cent. As a result, distributors refused to take deliveries and started de-stocking from January 2005, since there was no clarity regarding the quantum of input tax credit available on transition stocks.