Taxation - VAT - Value Added Tax

The rate of CST on inter-State sale of goods to registered dealers (against Form-C) shall now be the lower of 2 per cent and the rate of VAT or State Sales Tax applicable. This reduction forms a part of the roadmap for phasing out CST completely by 31st March, 2010 in preparation of introducing Goods & Services Tax (GST), the roadmap for which is being worked out by the EC of State Finance Ministers together with the Union Finance Ministry.

The Central Government and the Empowered Committee of State Finance Ministers have further agreed that the compensation for revenue loss to the States in any year arising from the lowering of CST will be limited to the proportionate loss based on the actual collection of CST in the relevant year.

The STAPM has filed SLP with Supreme Court which has been dismissed today by upheding the orders of the Bombay High Court

Therefore the due date for filing VAT Audit Reports for 2005-06 and 2006-07 is upto 30-06-2008.

With Warm Regards,

This is a step towards the introduction of Goods and Services Tax (GST) from 2010-2011 by phasing out CST, value-added tax and other taxes, thereby bringing in a unified tax regime encompassing both the Centre and the states. The process of phasing out CST started in 2007-08 with the rate having been reduced from four per cent to three per cent.

Briefing the newspersons on the decisions taken by the meeting of the empowered committee held here on Monday, the West Bengal Finance Minister, Mr Ashim Dasgupta, said that the abolition of CST would result in loss to some of the states like Maharashtra and the committee had worked out a formula for making good the losses to such states, which would be forwarded to the Union Finance Minister.
VAT revenue

The differences may be resolved at a meeting of the Empowered Committee of State Finance Ministers scheduled for May 5-6.

According to the original schedule announced in 2007, the CST rate was to be cut to 2 per cent from April 1, 2008. The date was subsequently changed to May 1.

There is no agreement between state and central governments on compensating states for the revenue loss of around Rs 7,000 crore in 2008-09 due to the reduction in the CST rate to 2 per cent. In 2007-08, the loss on account of the rate cut to 3 per cent from 4 per cent was pegged at Rs 6,000 crore.

The Centre wants states to increase the value-added tax (VAT) rate to 5 per cent from 4 per cent and impose VAT on textiles to make up for the loss. States have instead sought direct compensation from the central government.

With the central government yet to notify the cut, the CST rate continues to be 3 per cent on all inter-state sales.

The concessions include a VAT refund of 12.5 percent through the Air Ambience Fund, 15 percent subsidy on the base price of the vehicle also to be refunded to the dealer through the Air Ambience Fund for all indigenously manufactured battery-operated vehicles being noiseless and pollution-free.

Apart from this two percent concession in Road Tax and registration expenses would also be granted by way of reimbursement through the Air Ambience Fund.

After the Cabinet meeting, Chief Minister Sheila Dikshit said that the Congress Government would allow Delhi citizens to have access to a clean-fuelled vehicle to ensure an improvement in the air quality. Dikshit added that her Government was committed to ensuring that zero pollution vehicles were encouraged and given extra support. For making battery-operated vehicles attractive to consumers, certain concessions were necessary to be provided to customers to motivate them to opt for the cleaner vehicle option.

Dikshit further stated that the total collection from the Air Ambience Fund would be sufficient to cover such concessions.

The Cabinet also gave its approval for the signing of a memo of understanding with Indian National Trust for Art and Cultural Heritage (INTACH) for declaration of Delhi as a World Heritage city.

`We feel that what (compensation package) they (States) agreed for last year is applicable even this year and the subsequent years. But they don't think so.'

Reduction of Central sales tax (CST) ceiling rate from 3 per cent to 2 per cent may soon become a reality, with the Centre and the State Governments set to meet on Tuesday 15-4-2008 to sort out the thorny issues on compensation for the revenue losses that may arise to the States from such a move.

Official sources said that the Finance Minister, Mr P. Chidambaram, and the Chairman of the Empowered Committee of State Finance Ministers on Value Added Tax (VAT), Dr Asim Dasgupta, are to hold consultations on the compensation issue here on Tuesday. Prior to this, the State Finance Ministers are to meet under the aegis of the Empowered Committee. Indications are that the VAT panel would internally discuss this matter before meeting the Finance Minister.

Although Mr Chidambaram had announced in the Budget 2008-09 that the CST ceiling rate was proposed to be brought down to 2 per cent from April 1, the actual notification is yet to be issued by the Finance Ministry.
Compensation package

Official sources pointed out that the Budget had made it clear that the new CST rate of 2 per cent would be notified only after an agreement was reached between the Centre and the States on the compensation issue. Trade and industry is awaiting the notification of the CST ceiling rate cut.

While the Centre contends that there was no need to tinker with the compensation package agreed to by the States last year, the States have taken a stand that the compensation package needs to be negotiated afresh.

The strong economic growth and the resultant surge in CST collections had prompted the States to demand a revised compensation package.

"We feel that what (compensation package) they (States) agreed for last year is applicable even this year and the subsequent years. But they don't think so. That is the main issue," sources said.

Currently, the States collect and retain the entire CST, which is an origin-based tax. CST has been a massive revenue generator for the States, but is being viewed as incompatible in a VAT regime and hence the move towards its phase-out.

The CST rate was brought down from 4 per cent to 3 per cent on April 1, 2007.

Meanwhile, tax revenues of VAT-implementing States registered a 13.4 per cent increase during April-December 2007 to about Rs 1,19,000 crore.

The extracts from Finance Bill, 2008 state as follows:-

CST and a Roadmap towards GST

183. Following an agreement between the Central Government and the State Governments, the rate of Central Sales Tax was reduced from 4 per cent to 3 per cent in this financial year. It is now proposed to reduce the rate to 2 per cent from April 1, 2008. Consultations are underway on the compensation for losses, if any, and once agreement is reached the new rate will be notified. I am also happy to report that there is considerable progress in preparing a roadmap for introducing the Goods and Services Tax with effect from April 1, 2010.

The said notification is yet to be notified.

So, what is the rate of CST from wef 1.4.2008?

Some of the traders started with CST rate of 2% wef 1.4.2008, but some are charging 3%.

It is learnt that sales tax offices are demanding CST rate of 3%. Thier reason may be that the Finance Bill, 2008 is silent about CST amendment. Changes are proposed only in Budget Speech.

Some traders also informed that goods at check post are also held up demanding 3% CST.

This is for your information only.

The Central Sales Tax phaseout plan will miss a crucial deadline on Tuesday with both Centre and state governments failing to converge on the compensation package. As per the plan, CST which was reduced from 4% to 3% on April 1, 2007, is to be slashed by 1% further to 2% from Tuesday. State finance ministers are scheduled to hold discussions with Union finance minister P Chidambaram on April 8.

With the reduction in CST rate from 3% to 2%, the states would lose about 12,000-13,000 crore in revenues. The states want the Centre to compensate this loss in full. While the Centre is agreeable in-principle to this, differences have cropped between the two on the mechanism. The differences have also sprung up on account of the state governments demanding some tweaking-in in the already agreed formula at the time of deal on the CST phase out in early 2007.

State finance ministers will now meet Union finance minister P Chidambaram to strike a common ground on the compensation formula. Sources said missing the April 1 date was not of much consequence and the reduction to 2% could be carried out later, with retrospective effect. The levy is to be brought down to 2% from April 2008 and 1% in 2009, before being eventually abolished on March 31, 2010 to pave the way for roll-out of unified goods and service tax from April 1, 2010.

The compensation package for phasing out CST which began from April 1, 2007 includes transfer of power to levy service tax on some services, removal of additional excise duty on tobacco products and textiles, VAT on imports, abolition of Form D, budgetary support and hike in floor rate of VAT. The Centre has removed additional excise duty from tobacco, provided for budgetary support and has already begun transfer of revenues from 33 existing services to states. However, it is yet to bring the 44 new services under tax net.

HK Dwivedi, commercial tax commissioner, said the process involved in refunding VAT to the exporters is cumbersome at present, as the department has to cross check whether the VAT, for which the exporter has sought refund, has gone to the treasury or not.

"In fact refunding is also a trouble at the government of India level, and it is not only West Bengal, which has backlogs in refunding," Dwivedi said.

Although Dwivedi did not say the amount lying as backlog, he said by the end of 2007-08, the commercial tax department will be refunding Rs 50 crore against Rs 30 crore in 2006-07.

However, this is expected to increase in 2008-09 once the VAT rules are amended, Dwivedi said on the sidelines of an interactive session, organised by the Bengal National Chambers of Commerce & Industry.

The state finance minister proposed in his Budget that the government will be refunding to the exporters 50% of the VAT paid on the basis of book value within one month of the claim filed. The rest 50% will be refunded after proper verification.

KK Navada, president of BNCCI, said the proposed changes in the VAT rules is a welcome step, but industry will like to get more simple VAT returns forms, preferably sector-specific.

Briefing media persons after holding the cabinet meeting at Dharmashala, chief secretary Ravi Dhingra said that the cabinet noted that against a VAT rate of 20 percent applied by Himachal, the states of Haryana, Punjab and Chandigarh were only imposing a rate of 4 percent, which was resulting in smuggling and a heavy revenue loss to the state.

The cabinet decided to follow a middle path and it was decided to reduce VAT from 20 % to 12.5 %. It was also decided to reduce the license fee on Indian Made Foreign Liquor (IMFL) from Rs 160 to Rs 125 and on country liquor from Rs 130 to Rs 95 per proof liter. These measures would reduce the price per bottle of IMFL and Country liquor by Rs 23 and Rs 15, he said.

The cabinet also decided to continue with the individual vend / unit based applications system for allotment of retail vends in the state. It was also agreed that existing retail licensee holders who commit themselves to the new conditions of license fee and other levies would be given an option to apply for renewal. This system had been preferred as the number of people employed in the trade has gone up to 625 where as earlier it was monolplized by 25 persons only, said Dhingra.

The cabinet also decided to reserve 20 % of quota of country liquor for General Industry Corporation, a state public sector undertaking.

The excise department projected an increase of 10 - 12 % in excise revenue, which was expected to touch Rs 402 crore in 2008-09 against a Rs 360 crore projection for the current year.

The increase of VAT was proposed from slab of 4 per cent to 5 per cent and in furtherance of earlier declaration the CST will be reduced from 3 per cent to 2 per cent from April 1 this year.

"Reduction in CST to 2 per cent from April, 2008 will cause a revenue loss of about Rs 1300 crore to state governments and the Union government will compensate such loss and no extra burden of tax will be levied on traders and people," Delhi Finance Minister Dr A K Walia said.

He further said that ground realities of Indian business system will be kept in mind while enforcing Goods and Service Tax (GST) from April 1, 2010 in the country and necessary preparations have already been made for formulating a roadmap to GST.

The GST taxation system will also remove complexities of tax structure and burden of paper work and formalities of different taxes from the head of traders.

Earlier, while speaking at the conference, CAIT secretary general Praveen Khandelwal stressed the need of formation of a separate Ministry of Internal Trade both at Centre and State levels. -- UNI

The committee comprising state finance ministers is agreeable to the idea of a dual structure -- a central GST and a state GST, its chairman Asim Dasgupta told reporters here today.

The Empowered Group of State Finance Ministers on VAT would send its recommendations to the Centre next month after the state finance ministers give their views in writing, he said after the panel's meeting here.

"After getting the written viewpoints, we will finalise the report. But we hope to send the report to the Government of India by the month of December," he said.

In a nutshell, within the framework of GST, there would be more than one slab of tax for goods, but a single rate for services at the state level. At the central level, the rates will be decided by the union government, Dasgupta said, adding that they are likely to be on a similar pattern.

Like VAT, there would be set off -- that is amount of tax paid on inputs would be reimbursed -- at both the Central and state levels.

GST at the state level will subsume as many taxes on goods and services as possible and feasible, he said.

However, exact rates at the state and central level would be decided later, Dasgupta said.

He said efforts would be made to ensure that there is no double taxation on any goods and services between the Centre and states, which is there on some goods under the present dispensation.

Implementation of GST would also require Constitutional amendment at the central level and also at the state legislative level.

As an on-going effort to sensitize the stakeholders including the Government on the advantages of VAT, PHD Chamber recently met with Sunil Kumar, Commissioner (Trade Tax), and Government of Uttar Pradesh. He assured that the Department was going ahead with the preparedness for the implementation of VAT.

�We are delighted to know that the Government of UP has already drawn up a roadmap for implementation of VAT, which is a good augury. As the pre-eminent Chamber in the region, we shall provide all possible support to the Government in implementation of VAT in the State in the given time frame,� says Sanjay Bhatia, President, PHD Chamber.

It has been told to the Chamber by the UP State authorities that in next few days VAT forms will be ready and after the Cabinet approval, the Act and Rules will be sent to Government of India for their vetting.

It is also being assured that the change over from sales tax to VAT will be smooth and trade and industry in UP will not have the problems which they faced in other States. However, the authorities pointed out that VAT Act of other States cannot be role model for UP as ground realities and economic conditions are different.

It is also reliably learnt that refund system under VAT will be as good as in any other State if not better. No one will be penalized under VAT for unintentional mistakes.

It was also assured that the VAT system in UP will be based on trust. As UP is basically a consuming estate, the input tax credit for opening stock cannot be for the stock lying for more than six months. Rates under VAT will be determined taking into consideration the rates prevailing in the neighboring States.

On the issue of unutilized exemptions whether or not State will give option to assesses to continue with exemption or to have facility of moratorium of unutilized fixed capital investment for the un-expired period, the authorities assured that a balanced view would be taken.

UP, though is one among the last in switching over to VAT, it would have the advantage of the last mover. That is learning from the experiences of other States. The UP Administration has received around 800 suggestions after the Draft VAT Bill was placed on website.

The Department is interacting at local level with various organizations explaining them the provisions of the VAT Bill and also considering their suggestions for refining the Bill.

"The government has asked us to pay five per cent VAT. Since we are already paying service tax, the VAT burden will have to be borne by the passengers," Delhi Contract Bus Association general secretary Harish Sabharwal said.

Opposing the move, he said, if implemented, the owners of such buses would end up paying a total of 25 per cent tax, 12.5 per cent each on VAT and service tax.

When contacted, Delhi's finance minister Dr A. K. Walia said the government was seeking VAT from contract bus operators following a particular section of the VAT Act.

However, Sabharwal argued that the operators did not fall under the right to use provision of the VAT Act since services were being provided on hire in contractual form and service tax was being already paid on contractual amount.

"Nothing is being transferred, sold or alienated to hirer. The absolute control remains with the bus owner on vehicle as well as staff of the bus," he said.

Unlike those taxis which are given on rent for personal use, Sabharwal said, "In our case, the staff employed are accountable to owner of the bus in discharging services at all stages."

Dr Walia said a meeting would be convened soon involving all concerned to ascertain whether the bus operators fall under the VAT category.

Official sources said that the order states that the Empowered Committee of State Finance Ministers on VAT, also known as the VAT Panel, would work with the Central Government to prepare a roadmap for introducing GST in the country from April 1, 2010.

The VAT Panel would also deal with all the related matters, they added.