GST or Not, Abolish Central Sales Tax
Posted on February 16, 2011 | View 884
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The Tiny, but Unjust, Tax Must Go The central sales tax (CST) is the root of many distortions and inefficiencies in the current tax system. It is a tiny tax, but inflicts pain like a chronic migraine. It is unjust, difficult to enforce and prone to evasion. The states pour vast sums of money in setting up inter-state checkposts to enforce the tax, which are a useless fixture, and serve little purpose other than to supplement the incomes of those manning them. The barriers they create are a blot on the common market of India. Being an origin-based tax, CST violates the principle of interjurisdictional equity. It is an extra-territorial tax by the producing states on the residents of the consuming states. It is also a major contributor to tax cascading as no credit is allowed by any government for the tax paid on inter-state purchase of inputs. The enhanced costs create a competitive disadvantage for the Indian suppliers. To avoid the tax, manufacturers first stock transfer the goods to their own depots in other states and then make a local sale. But that makes the supply chain complex and expensive. In one recent study, an electrical manufacturer had set up 26 distribution centres, which could be reduced to five if CST is abolished. Despite this, the states want to hang on to the CST only for the revenue consideration. However, the loss in CST revenues can be more than offset by a suitable adjustment in VAT rates, broadening the tax base and enhanced compliance. To illustrate, when CST was reduced from 4% to 2%, the reported inter-state sales in some states (e.g., Delhi) shot up by more than 100%! Some states have argued that reduced CST creates much larger arbitrage opportunities for the dealers to show intra-state sales (taxable at 4% to 15%) as inter-state sales (taxable at 2%). Such activities can be controlled through ITenabled mechanisms like TINXYS (Trade Information Exchange System) that allow proper reporting and monitoring of inter-state transactions and for collection of tax on them. TINXYS has already been developed, but it’s accumulating dust on the shelf for want of attention from state bureaucracies. GST can provide an impetus, but is not essential, for the adoption of such technologies. Satya Poddar
Partner, Ernst & Young

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Else Exports will be Uncompetitive CST is levied on interstate transactions on the basis of ‘origin’. Presently, it is levied at the rate of 2%. Such a levy conflicts with the principle of inter-jurisdictional equity. Since the commodity in interstate trade bears the burden of CST as well as local sales tax (or VAT) of the importing state, the total burden on interstate commerce becomes excessive. The incidence of this tax is borne by the consumers of the state wherever the goods are consumed. That is, the tax is levied by the exporting state and paid by the consumers of the importing states. Thus, it discriminates against the consuming states through tax exporting by the producing state. Even the revenue from the tax is unequally distributed among states. The information on distribution of revenue from CST collected by states indicate that six high-income states account for 45% of the total revenue of CST, while the low-income states get a meagre proportion of the revenue. Taxation of interstate sale combined with tax on inputs encumbers exports since under such a system, the incidence of tax on exports cannot be refunded. In fact, it can not even be reliably quantified. Although the CST Act provides for exemption of tax on exports, the exemption is available on fulfilling certain conditions which cannot be generally complied with by the dealer exporting the commodity. The exports, therefore, bear the brunt of this tax and become less competitive in the international market. Thus, the existing CST works as a severe obstacle to the formation of a unified market and makes the Indian industry and trade non-competitive in the domestic as well as in the international market. Taxation of interstate transactions is, therefore, harmonised in all the federations. The chances of introducing GST are becoming bright with the recent meeting of the empowered committee proceeding towards breaking the deadlock. Under the GST regime, the harmonisation would be attempted through the introduction of a destination based tax. However, it should be crystal clear that an origin based CST has no place in an open economy. It must be abolished. Mahesh C Purohit
Director, Foundation For Public Economics & Policy Research

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