Introduction

In pursuance to agreement reached between Central Government and Empowered Committee of States for implementation of Vat, it has been agreed to phase out Central Sales Tax in stages. CST has been reduced from 4% to 3% w.e.f. 1-4-2007. It is proposed reduce CST by 1% every year and to make it Nil by 1-4-2010. Such reduction can be made by Central Government by issue of a notification under proviso to section 8(1) of CST Act (as amended w.e.f. 1-4-2007). Thus, further reduction in CST will not be automatic, but will be only if the reduction in CST rate is notified by Central Government.

CST rate has been reduced to 2% w.e.f. 1-6-2008.

 Abolition of ‘D’ form

So far, sale to Government was treated at par with sale to registered dealers. CST rate applicable for sale to Government was 4% if Government issued D form. Now, this provision has been abolished. Government cannot make purchases at concessional rate by issuing ‘D’ form. In other words, sale to Government will be treated as sale to unregistered dealer and CST rate as applicable to unregistered dealer will apply in respect of sale to Government. Necessary amendments have been made in sections 6(2), 7(2A), 8(1), 8(3), 8(4) 9(1), 10(a) and 10A(2)(a) of CST Act.

 Reduction in CST rates in case of sale to unregistered dealer

So far, CST rates as applicable to sale to unregistered dealer was really penal in nature. The CST rate was (a) in respect of declared goods : twice the rate applicable to sale or purchase of such goods inside the State  (b) in respect of goods other than declared goods : rate as applicable for sale inside the State or 10% whichever is higher [section 8(2) of CST Act as existing upto 31-3-2007].

Now, in case of sale to unregistered dealer, the CST rate will be same as applicable to sale within the State as per sales tax law of that State. Distinction between declared goods and goods other than declared goods has been abolished [section 8(2) of CST Act, as amended w.e.f. 1-4-2007].

Explanation to section 8(2) as added w.e.f. 1-4-2007 clarifies that even if a dealer is not liable to pay tax under local sales tax law, he will be deemed to be a dealer liable to pay tax under local sales tax law for purpose of section 8(2). The purpose of this explanation is not clear and indeed appears to be redundant, since CST rate in case of unregistered dealer has nothing to do with his liability under local sales tax law.

Rate of Central Sales Tax

The position w.e.f. 1-6-2008 is as follows , in case of both declared goods and other goods [section 8(1) of CST Act in respect of sale to registered dealer and section 8(2) of CST Act in respect of sale to unregistered dealer -

1        In case where local sales tax rate is 4%, CST applicable in case of sale to unregistered dealer will be only 4% as against 10% as was applicable upto 31-3-2007. In case of sale to registered dealers, the CST rate will be 2% w.e.f. 1-6-2008 [The rate was 3% during 1-4-2007 to 31-5-2008 and 4% prior upto 31-3-2007].

2        In case where local sales tax rate is 12.5%, CST applicable in case of sale to unregistered dealer will be 12.5%. This position is same as was applicable upto 31-3-2007. In case of sale to registered dealers, the CST rate will be 2% w.e.f. 1-6-2008 [The CST rate was 3% during 1-4-2007 to 31-5-2008 and 4% prior upto 31-3-2007].

3        In case where local sales tax rate is 1 or 2%, CST applicable in case of sale to unregistered dealer will also be 1 or 2%, as against 10% as was applicable upto 31-3-2007. The rate will be 1% even when sale to unregistered dealer is by transfer of documents. In case of sale to registered dealers, the CST rate will be 1 or 2% as applicable to the goods within the State. This position is w.e.f. 1-4-2007.

4        In case where local sales tax is Nil, CST applicable in case of sale to unregistered dealer will also be Nil. In case of sale to registered dealers, the CST rate will be Nil. This position is same as was applicable upto 31-3-2007 and also during the period 1-4-2007 to 31-5-2008.

Power to Central Government to further reduce rate of CST - CST has been reduced from 4% to 3% w.e.f. 1-4-2007 and to 2% w.e.f. 1-6-2008. It is proposed to reduce CST rate by 1% every year and to make it Nil by 1-4-2010. Such reduction can be made by Central Government by issue of a notification under proviso to section 8(1) of CST Act (as amended w.e.f. 1-4-2007). Thus, further reduction in CST will not be automatic, but will be only if the reduction in CST rate is notified by Central Government. However, it will not be necessary to amend CST Act for this purpose.

It is expected that when CST rate is reduced to Nil, full credit of tax paid on inputs will be available i.e. inter-state sales and dispatches will be ‘zero rated’ and not ‘exempt’. However, the white paper issued by empowered committee does not categorically say so.

Welcome change – The change is really welcome. In case of goods where State sales tax rate is 4%, if the buyer does not furnish C form, the selling dealer will be liable to pay tax @ 4% instead of 2%. So far, in such cases, he was required to pay CST @ 10% (twice the local sales tax rate in case of declared goods), which was indeed a very heavy penalty. Thus, risks involved in not getting C form from buyer have been considerably reduced.

In view of this, harassment in getting blank C form from department and ‘charges’ payable for getting blank C forms should come down. Of curse, provision of submitting C form on quarterly basis continues. Thus, ‘expenses’ involved in getting blank C forms from department cannot be avoided.

Of course, the tax burden is heavy where local sales tax rate is 12.5%, since in that case, the selling dealer will have to pay CST @ 12.5%, instead of @ 2%, if the buyer fails to furnish C form.

CST rate at a glance- The CST rates at a glance as applicable w.e.f. 1-6-2008 are as follows, in case of both declared goods and other goods –

Note – Usually, State Vat rates of 2%, 3%, 8% and 10% do not exist. However, these rates are given only to explain the principle, particularly because Uttaranchal have not introduced Vat.

CST rate during 1-4-2007 to 31-5-2008- The CST rates at a glance as applicable during 1-4-2007 to 31-5-2008 are as follows, in case of both declared goods and other goods –

 Tobacco products no more declared goods

Section 14 of CST Act declares some goods as ‘goods of special importance’. Section 15 of CST Act provides restrictions on imposition of sales tax by State Governments on articles covered under section 14 of CST Act, known as ‘declared goods’. One restriction is that sales tax rate cannot exceed 4%. One of the clauses in section 14 (clause ix) was in respect of un-manufactured tobacco, cigars, cigarettes and other manufactured tobacco. This clause has been deleted w.e.f. 1-4-2007. Corresponding change has been made in Additional Duties of Excise (Goods of Special Importance) Act, 1957 [AED(GSI) Act].

Thus, State Governments can now impose Vat on un-manufactured tobacco and tobacco products. Some State Governments like Maharashtra and Karnataka have already imposed 12.5% Vat on cigarettes w.e.f. 1-4-2007. Other State Governments will certainly follow soon.

In a matter of few years, the sales tax rate can as well exceed 20% since tobacco products is a favourite ‘whipping boy’ of all finance ministers. Manufacturers of tobacco products cannot invoke any sympathy and hence a tax on tobacco products can never be (at least openly) opposed.

Encourages tax evasion – Even if consumption of tobacco products is injurious to heath, so long as its sale and consumption is not prohibited, its sale is not illegal. It is experience world over that higher rate of taxes encourages tax evasion and encourages ‘mafias’.

Abnormally high rate of duty and taxes means that tax evasion becomes a very profitable business. The result is that honest tax payers have either to start using questionable means or to close the shop.

Such tendency may be less in organized sector like cigarettes, but in case of unorganized sector like bidi and un-manufactured/manufactured tobacco, role of unorganized sector is very significant and hence tax evasion is high.

This factor should be kept in mind by Government while imposing heavy taxes on such products.

Role of tobacco products in employment generation – Without anyway justifying consumption of tobacco products, it is required to be stressed that tobacco and tobacco products provide employment to millions. Thus, it has become a ‘necessary evil’, since it is practically impossible to find alternate employment to so many people. (Incidentally, I am not lobbying for tobacco producers. I am only making statement of facts).

 AED(GSI) Act practically made ineffective

Additional Duties of Excise (Goods of Special Importance) Act, 1957 [AED(GSI) Act] provided for imposition of additional duty of excise on some products known as ‘declared goods’. These goods are same as ‘declared goods’ under section 14 of Central Sales Tax Act.

AED(GSI) on textile articles was exempted w.e.f. 9-7-2004. AED (GSI) on all other goods has been fully exempted vide notification No. 11/2006-CE dated 1-3-2006. These duties have been merged with basic excise duty. This was probably to allow States to levy VAT on these ‘declared goods’.