As Telangana becomes a separate state in June, sales and purchase transactions between dealers located in Andhra Pradesh and the new state would be subjected to Central Sales Tax (CST). Fearing an increase in their cost of doing business, industry has approached the state government to press the Centre to defer the levy of CST or reduce the rate on movement of goods within the two states.
CST is a tax on inter-state movement of goods levied by the Centre but collected by the states. While states retain the proceeds from the tax, only the Centre has the power to increase or decrease the CST rate which is now two per cent.
As Andhra Pradesh and Telangana would be two states from June, this tax will be levied on transaction of goods between them. The goods moving out of Andhra Pradesh and Telangana to a third state will not be impacted, as they were already subjected to two per cent CST.
“The immediate concern of the industry is that the transactions between these two states should not come under CST as it will be a big impediment for business,” said S Thirumalai, partner, Deloitte.
Industry in the two states has urged the government to keep CST in abeyance. As the Centre would need Parliament’s approval for any such change and that might not happen anytime soon, considering the new government will be formed after the election verdict is out on May 16, traders have suggested that the state governments allow them to collect tax and not deposit it with the exchequer till clarity emerges. The other suggestion is to lower the CST rate to one per cent for the two states.
The Commissioner of Commercial Taxes will meet industry representatives in Hyderabad on Thursday to discuss the issue, following which a representation would be sent to the Centre.
B Sriram, partner, EY, said there was not much precedence of the Centre keeping CST in abeyance in case of bifurcation of states. Only when Uttarakhand was carved out of Uttar Pradesh was an exemption made for levy of CST at one per cent in particular cases for goods going out of the state.
The Centre might also give tax incentives to these states in the form of excise duty reduction to promote economic growth according to the Andhra Pradesh Reorganisation Act, 2014.
It might also give grants to backward regions of Andhra Pradesh. A committee has been formed in Andhra to see what kind of incentives can be given. It will submit its recommendations in two to three weeks.
Sriram said although not much was given at the time of bifurcation of Jharkhand from Bihar and Chhattisgarh from Madhya Pradesh (Uttarakhand got some excise concessions because it was a hilly state), the Centre might keep its commitment of fiscal sops to both Andhra and Telangana even if a new coalition comes to power in New Delhi.
“Andhra Pradesh is more backward, but Telangana is a new state with less developed infrastructure. So they might give a special package to both the states to motivate industry,” Sriram added.
So far, transactions anywhere within Andhra Pradesh were attracting value-added tax (VAT). VAT is levied on goods at every level in the production chain till they are finally sold to the end consumer. Traders can take the credit for tax paid on inputs while paying their due. In case of CST, however, no input tax credit is given and goods moving from one state to another become a little costlier.