States may get to tax sugar,textiles without losing revenue

States may get to tax sugar and textile and yet not lose revenue with the Thirteenth Finance Commission...

States may get to tax sugar and textile and yet not lose revenue with the Thirteenth Finance Commission (TFC) likely recommending that there should not be any deduction from the divisible pool in case states tax these items.

According to the current practice,if states tax sugar and textiles,they would lose 1 per cent of their share from the divisible pool of the total tax proceeds. Currently,states get 30.5 per cent of the gross tax receipts.

Traditionally,textile,sugar and tobacco have been taxed by the Centre under the Additional Excise Duty (Goods of Special Importance Act) due to which states were unable to tax these products. However,with the plan to phase out the Central Sales Tax (CST),the Centre had allowed states to levy tax on tobacco following which it was removed from the excise duty.

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States could levy tax on textile and sugar as well but in that case they would have to lose one per cent from their total share of 30.5 per cent. However,sources told The Indian Express that the TFC has suggested that states be allowed to tax textiles and sugar without having to lose 1 per cent. The recommendation of the TFC is likely to be accepted by the Centre,the sources added.

So far,states have avoided taxing the products because the loss of 1 per cent is more than the likely revenue that would be generated in case the products are taxed,the sources said.

Even when the finance ministry had asked states to levy Value Added Tax (VAT) on textiles and sugar so as to reduce loses likely to occur due to phasing out of CST,the states remained reluctant. They expressed their reservations over levy of VAT on textiles and sugar. In fact,this is one of the conditions that the states may be required to meet for getting better compensation from the Centre for the CST revenue loss in 2009-10.

States have also been arguing that VAT on sugar may not be appropriate when retail prices of sugar are high and also due to the economic downturn,it may not be feasible to tax textiles too. The CST ceiling rate was reduced to 2 per cent from June 1,2008,as a part of phasing out of the levy by March 31,2010.