While a number of states have increased value-added tax (VAT) rates to get a higher share of the proposed goods and services tax (GST), Gujarat has gone a step further. Instead of increasing VAT, it has increased central sales tax (CST) covertly by reducing VAT credit against CST.
In its 2010-11 budget, it sought to bring down VAT credit by 2 per cent for goods bought from within Gujarat and sold in other states. In effect, this will increase CST by 2 per cent to 4 per cent.
CST was to be phased out at the launch of GST, according to finance ministry directions. All the states were to reduce it gradullay and phase it out at the launch of GST. At present, 2 per cent CST is applicable on goods moving out of Gujarat. The state was supposed to reduce it further. But the state reasons that it has suffered huge losses in tax revenues due to decrease in the concessional rate of CST against Form C from 4 per cent to 3 per cent with effect from April 2007 and from 3 per cent to 2 per cent with effect from June 2008.
Industry protests that it will put the state industry at a disadvantage against other states. Ficci Secretary-General Amit Mitra has written to Finance Minister Pranab Mukherjee, urging him to share his view with Chief Minister Narendra Modi. “The proposed amendment will seriously affect trade and industry. The contracts for running projects would have to be revisited to determine whether additional cost over and above the mutually agreed contract price would be reimbursed by the customer,” said Mitra.
The industry says it can result in geographical integration of markets, relocation of industries and serious economic distortions within Gujarat.
“It would put Gujarat industry in a tricky situation. As the cost of business will go up, either industry will have to bear the pressure on profit margins or increase prices,” said Gaurav Taneja, partner and national tax director, Ernst & Young.
This is opposed to the central government’s endeavours to phase out CST by gradually reducing the tax rate, which forms part of the road map for its complete phaseout at the launch of GST. Industry feels this proposal of Gujarat could encourage other states to follow, like it had happened in case of VAT recently.