In a significant departure from its original plans, the Centre and states have decided not to reduce the Central Sales Tax (CST) rate in 2009-10. Instead, the tax will be completely withdrawn once the proposed goods and services tax (GST) is introduced.
As part of the implementation of value added tax (VAT) and introduction of GST in the country, the Centre and the states had agreed to phase out CST through a 1% annual rate cut starting April 1, 2007, over a period of four years. It was scheduled to be completely abolished by 2010-11.
At present, the tax, which is levied on inter state sale of goods, is at 2%. It was scheduled to be reduced by another 1%, starting April 1, 2009. At the time, the rate cut was postponed on account of the general elections and the Election Commission’s code of conduct. Recently, the empowered committee of state finance ministers wrote to the Union finance ministry recommending that the tax should be completely withdrawn when GST kicks in, as there is massive evasion of VAT (which goes to the states’ coffers).
“There was large scale trade diversion as there are no checks and balances in place to prevent tax evasion. So instead of paying a 12.5% Vat on sale of goods, dealers claimed inter-state sale of goods and got away by paying a 2% CST in return,” a finance ministry official told FE.
In fact, a study by the empowered committee revealed that tax evasion was so massive that in many states, despite a 1% cut in CST in 2008-09, collections from the tax increased by as much as five to six times during the fiscal.
Meanwhile, collections from Vat have been dipped by over 15% last fiscal, partly on account of the downturn in the economy and partly because of tax evasion.
“We have accepted the EC’s recommendation and will not notify the CST rate cut,” the official said.