Central Sales Tax: Should it be abolished?

Central Sales Tax (CST) was meant to be abolished three years ago but is still into practice. The impending presentation of the budget has shot up the expectations yet again. Read out to know more…
Badrinath NR

In terms of the initial agenda on phasing out of CST and as confirmed by the then Union Finance Minister P Chidambaram, the CST was to be abolished from 01.04.2007. However, even now the levy continues, as the states are yet to arrive at a consensus on the compensation package. Currently, CST is levied at two per cent. It is expected that the same would be reduced to one per cent in the forthcoming Union Budget to be presented on 26.02.2010. Nevertheless, the expectation of the industry is a complete abolition of CST through the forthcoming budget.  

Currently, in India, the continuance of CST by the Central Government has to a significant extent impacted the trade between states. The framework within which the VAT laws operate is that the CST payable on inter-state sales practically qualifies as ‘output tax’ under the state VAT laws, which means that the same may be discharged by using any of the eligible input credits. However, in relation to grant of input credits, CST paid on inter-state purchases is not allowed as input credit - only the VAT paid on purchases (typically, intra-state purchases) qualifies as input credits. This implies that the tax paid on local procurements qualifies for set-off against CST payable on inter-state sales.  

Thus, as a buyer, one would always want to buy locally within the state so that VAT paid thereon could be availed as credit though the rate of VAT is higher than two per cent. This comes from the fact that the whole of VAT can be availed as credit and further could be a good working capital management tool, if planned effectively – for instance, if a buyer is making a purchase of goods worth Rs 100,000 (VAT at 12.50 per cent) in the month of April with a credit terms of say, 60 days, the amount of VAT at Rs 12,500 may be availed as credit immediately in April (month in which the goods are purchased) and can be utilised for discharging VAT / CST dues arising to the dealer on account of sales made in April. It is relevant to note that while the actual cash outflow of Rs 12,500 for the dealer would be in the month of June, the same can be availed as credit in April.  

As a seller of goods from outside the state, is constantly challenged to identify alternate distribution mechanisms to be able to finally strike the right price with the buyer. In this regard, making a stock-transfer of the goods to the destination state and thereafter making a local sale to the customer is widely applied. In this regard, the meaning of the expression, ‘inter-state sale’ in the CST act merits importance. In a circumstance where the identity of the ultimate buyer is identified at the time of making the stock transfer of the subject goods to the destination state, it would be deemed to be an inter-state sale and the claim of stock-transfer would be disallowed. Thus, as a seller, he is virtually left with no option but to make an inter-state sale and absorb the cost of CST.  

In specific to the retail sector, it seldom is the case that all goods are purchased within the state, implying a higher cost of goods in case of inter-state purchases – result - erosion of margins to the retailer or alternatively a higher cost of the product for the end consumer.  

While the reports in the recent past indicate a growth in the business, the retail sector opines that the common man is yet to change his spending habits. Consequently, it implies that the retail sector is yet to witness its part of the growth story. Consequently, it appears to be the right time for the Government to abolish the CST or atleast reduces the same to one per cent through the forthcoming Union Budget to be presented on 26.02.2010 and move towards a complete abolition with the proposed introduction of GST.  

Further to the above, one would note that the rate of inflation is high and is further rising. Reduction / abolition of CST could help the Government in keeping the same at its current levels if not reduce.  
 

 

Publish Date
Not Sponsored
Live: People Reading Now
 
 
 
 
TRENDING ARTICLE
RECOMMENDED FOR YOU