Domestic industry stands to gain big time from a Centre-state tussle on revenue sharing. As part of the states compensation package for phasing out central sales tax (CST), states are likely to be given the right to levy value-added tax on imports.

Right now, imports are exempt from sales tax while domestic produce bears sales tax (now VAT). This erodes the protection that domestic industry receives, via import duty, from foreign rivals. In fact, in all the cases where import duty is lower than the state-level VAT, domestic industry faces negative protection.

Introduction of VAT on imports on par with domestic produce will level the playing field. The states are also expected to tax some services as part of the same compensation package. Domestic industry has repeatedly claimed that it faces discrimination vis--vis imports, thanks to a plethora of taxes that imports are spared.

Though the last Budget attempted some parity by imposing countervailing duty on imports in addition to Customs duty on certain items, it did not go far enough. Countervailing duty is meant to neutralise the impact of excise duty that domestic industry pays and imports are spared.

However, the final decision on the package and proposed phase-out of CST is expected next month at the meeting of the empowered committee of state finance ministers. The concept is sound in principle. Since there are as yet no countervailing duties on imports whose domestically-produced counterparts attract state-level sales tax, the measure could be a useful one, said NIPFPs Kavita Rao.

The states were for full compensation of loss of revenue on account of CST phase-out. A package is being worked out which includes additional power to states to tax services, VAT on imports, VAT on items under additional excise duty and some relaxation on declared goods provision, panel chairman Asim Dasgupta told reporters after a meeting of the empowered committee.

He said if there were still some shortfall compared to the current revenue of the states after the CST phase-out, a budgetary support would be sought from the Centre to meet the gap. However, he said the Centre and states still had differences on the package, which needed to be ironed out.

The panel would meet finance minister P Chidambaram in the first week of January. The states have demanded an increase in share in devolution of service tax from the Centre or giving them power to tax services such as telecom and financial services. They are not happy with the list of local services, which the Centre proposed to give them for taxation.
 
The Centre, on its part, is not ready to accept the demand for an increase in share of states in central revenues, from 31.5% to 50%. Mr Dasgupta said certain proposals such as VAT on imports would require legislative amendments.
With the panel seeking relaxation on declared goods, mainly inputs such as coal, steel, crude oil and cotton, these may attract a higher VAT.

At present, the items under the declared goods list cannot be taxed above 4%. Asked about the items that would be brought under VAT net from additional excise duty ambit, Mr Dasgupta did not elaborate. Tobacco, textile and sugar attract AED at present.

The CST was originally scheduled to be reduced by 1% from October 1 but due to differences between states and the Centre on the compensation package, it was deferred to April 1, 2007. From April, CST has to be reduced by 2% if the timeline for the phase-out is to be adhered to.