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Dialogue needed on taxing LPG

Union Finance Minister P. Chidambaram, in his budget speech, announced the Government's intention to amend the Central Sales Tax (CST) Act 1956, bringing liquefied petroleum gas (LPG) under the list of `declared goods', so that States do not levy sales tax, or its new incarnation, the value added tax (VAT), at a rate not exceeding four per cent on this widely used domestic fuel. That the Centre has thought of invoking the CST to solve the problems arising from the escalating international prices of petroleum only highlights the perils of prolonged failure to face head-on federal issues in the matter of taxation. The move comes years after the Centre had started a campaign to persuade the States to agree to abolition of the CST, a tax on inter-State transfer of goods, with a view to accelerating the movement towards a State-level VAT in place of sales tax. The main objective of the CST Act, it must be remembered, was on one side to empower the States to levy a tax on inter-State transfer of goods and on the other to ensure that such a tax was at a moderate rate and did not pose a major hurdle to nationwide commerce. It was with a similar objective that the Act also provided that, in the case of specified "declared goods" of special importance to the economy and the consumer, the local sales tax (ST or VAT) on these goods too did not exceed four per cent.

It is an irony that after a majority of States have agreed on a common State-level of VAT at 12.5 per cent on LPG, and put in their case for compensation from the Centre as a condition for abolition of CST itself, New Delhi resorts to the same Act to get the States to share with the Centre the revenue sacrifice needed to contain the losses being incurred by oil companies due to underpricing of LPG. This development on the CST front comes on top of more than a decade-long impasse over `double taxation.' The latter phenomenon has arisen because exporting States tend to charge CST on goods sent to other States for subsequent sale from a warehouse or consignment agent, while the importing States interpret the same sale as a local sale and levy the local sales tax on it. It was after repeated directions by the Supreme Court that the Centre last year designated the Advance Ruling Authority for Income Tax as the mechanism for resolution of such disputes, in which members of trade suffer for no fault of theirs. However, it is doubtful whether the Authority meant to deal with queries on direct tax matters will be able to settle inter-State claims on an indirect tax. Considering all this, the Empowered Committee of State Finance Ministers on VAT, which has decided to hold discussions with the Centre on compensation for lowering VAT on LPG, should use the occasion to clinch all pending issues in respect of CST.

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