Bangalore Chamber wants central sales tax abolished as VAT comes in

The Bangalore Chamber of Industry and Commerce has come out strongly against the continuation of central sales tax (CST) after the introduction of value added tax (VAT) in its pre-budget memorandum to the Karnataka government.

"We firmly believe that the continuance of CST will hinder and stunt growth," it declares. When the European Union is talking of set-off provisions across countries, the central and state government should take a bold initiative and abolish CST or at least think of set-off provisions for inter-state movement of goods.

Even if it is assumed that abolition of CST will result in loss of revenue of approximately Rs.15,000 crore, the buoyancy that the VAT regime will bring in will offset the loss. Therefore, CST is a small price to pay to make India globally competitive, the chamber argues.

Several advantages will accrue from the abolition of CST. Free interstate movement of goods will be facilitated. The cascading effect of taxes will be curtailed.

It will reduce tax induced distortion on account of vertical or horizontal integration. The invoice itself can act as a document for claiming rebate/proof of inter-state purchase among others ensuring smooth and speedy administration.

It is understood that as an alternative to immediate abolition of CST, the central government is considering the phasing out of CST over a period of three years. To achieve this goal, the CST must be reduced to 2 per cent with effect from this April and abolished in the subsequent year.

In case both the above options are not acceptable to the government, then the CST paid on purchase must be allowed to set off in the VAT regime in the destination state, urges BCIC. It will not be a burden on the states to absorb this 2 per cent set-off, considering the buoyancy that VAT regime will generate and the transparency that it will create.

In order to usher in the VAT law which is expected to be simple, transparent, easy to understand and consequently generate buoyant revenues, it is desirable to classify goods on HSN (harmonised system of nomenclature) basis. This will ensure uniformity in classification across states.

The same VAT rates should be applied across states in respect of similar goods. The set off provisions should be uniform across states in respect of similar commodities and trade. There should also be no disparity in respect of branded, unbranded, man made, machine made, packed and unpacked goods under the harmonised system. Exemptions and reduction in tax rates should be uniform across the states.

Presently, there is no uniformity in respect of sales tax laws across states. Each state has its own definitions, notifications, schedules, rates of tax, and list of goods, resulting in absolute chaos and leading to innumerable litigations.

Take the definition of capital goods. In Karnataka, capital goods means plants, including cold storage and similar plants, machinery, goods vehicles and equipment or any other goods, whose total cost is not less than an amount to be notified by the government or the commissioner, and used in the course of business other than for sale. In Delhi, capital goods means plants, machinery and equipment used in the process of manufacturing.

In order to usher in a semblance of uniformity and clarity in law and rates under the VAT regime, the following issues must be addressed, says the chamber. The powers of the state governments to amend VAT law must be restricted and further such powers should be uniform across states. The rules, forms must be uniform. Self printing of forms, documents should be permitted.

Very importantly, the chamber argues that allied levies such as entry tax, turnover tax, octroi, surcharge and cess among others must be abolished in all states. Any new tax imposed should be VAT-able. VAT registration number should be unique and applicable across states, similar to PAN under the Income Tax Act. Check posts needs to be abolished in all states since VAT is self-policing.

In the event CST is abolished and tax paid on inter-state movement of goods is allowed as a set-off, a separate VAT rate for inputs is neither necessary nor required. In this scenario, "we do not envisage any litigations and no separate classification will be required. This will also reduce the administrative costs, argues BCIC.

If this is not done, the classification as to whether a commodity is an input or a finished product will be litigated which will cause uncertainty in the minds of the trade and industry. The interpretation of inputs will vary from officer to officer.

The classification of inputs by way of a schedule to the VAT Act may not be exhaustive and may differ from state to state. Certain commodities may be inputs or consumables, which will give rise to misclassification by dealers leading to litigations.

Despite all this, if a separate VAT rate is envisaged for inputs, the states should not come out with any list or schedule of such inputs. The present system of taxation of inputs has withstood a number of litigations and is a time tested provision. Thus, instead of having a schedule or listing of inputs, a declaration may be obtained from the buyer to avail such lower VAT rates on inputs.

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VAT checklist

• Loss will be made up by revenue buoyancy
• Introduce harmonised system of nomenclature
• Same VAT rates should apply to similar goods everywhere
• Laws, definitions, notifications should be uniform across states
• Abolish allied levies like entry tax, turnover tax, octroi
• Abolish checkposts as VAT is self-policing
• No need for separate input rates