Chapter on Finance

STATE VALUE ADDED TAX (VAT)

• Under Entry 54 of List II (State List) of the 7th Schedule of the Constitution of India, “tax on sale or purchase of goods within a State” is a State subject.
• Introduction of State VAT to replace the earlier Sales Tax systems of the States has been one of the important tax reform measures taken on indirect tax side.
• VAT has been introduced by all the States / UTs, except the UTs of Andaman & Nicobar Islands and Lakshadweep.
• Sales Tax/VAT being a State subject, the Central Government played the role of a facilitator for successful implementation of VAT.
• A Mission Mode project for computerization of VAT administrations of States and UTs has been launched.

CENTRAL SALES TAX (CST)

• The entry 92A of List-I (Union List) empowers the Central Government to impose tax on inter-State sale of goods.
• Article 269 (3) empowers the Parliament to formulate principles for determining when a sale or purchase of goods takes place in the course of inter-State trade of commerce.
• Article 286 (2) of Constitution empowers the Parliament to formulate principles for determining when the sale or purchase of goods takes place outside a State or in the course of imports into or exports from India.
• Article 286 (3) of Constitution authorizes the Parliament to place restrictions on the levy of tax by the States on sale or purchase of goods, declared by the Parliament by law to be goods of special importance in the inter-State trade or commerce.
• The Central Sales Tax Act, 1956 imposes the tax on inter-state sale of goods and formulates the principles and imposes restrictions as per the powers conferred by the Constitution.
• Though the Central Sales Tax Act 1956 is a Central Act, the States collect and appropriate the proceeds of Central Sales Tax as per Article 269 of the Constitution of India.
• The CST however, being an origin-based non-rebatable tax, is inconsistent with the destination based taxation concept of VAT.
• CST rate had been reduced to 2% from 1st June, 2008.
• The States have been compensated through a combination of revenue enhancing measures and budgetary support.
• Enabling provisions had been made for States to levy VAT on Tobacco and Tobacco Products without losing any part of the devolution of Central taxes to the States.

 GOODS AND SERVICES TAX (GST)

• The proposal to introduce a national level Goods and Services Tax (GST) by April 1, 2010 was first mooted in the Budget Speech for the Financial Year 2006-07.
• Some of the main recommendations of the Standing Committee on Finance on the subject include:

1. Inclusion of petrol and petroleum products and alcoholic liquor within definition of GST,
2. Dispute resolution among States and between Union and the States to be done by Goods and Services Tax Council,
3. Abolition of Entry Tax,
4. Establishment of a GST compensation Fund through a Constitutional Amendment,
5. Distribution of the remaining proceeds of GST amongst States and Union at the end of financial year,
6. Viability of Modified Bank Model for settlement of proceeds arising out of inter-State Trade,
7. Establishment of GST monitoring cell.