If you keep the tax payer base constant, cut tax rates and throw in an economic slowdown, tax collections should fall, right? The central sales tax (CST) regime defies this logic, though. Though it was slashed by a third to just 2% for 2008-09, collections by December 2008 had risen by 2.9%.
CST inflows in 20 states stood at Rs 11,820.43 crore till December 2008 as against Rs 11,486.38 crore a year ago. This, at a time when tax collections across the country were declining and states had begun lamenting that the downturn had hit their value-added tax receipts.
The phenomena seemed puzzling until taxmen realised that traders have been evading the 12% VAT by showing their sales as ?inter-state? sales and paying a much lower 2% CST. This was rampant in states like Assam, Gujarat, Chhattisgarh, Rajasthan and West Bengal?which saw CST collections jump by 10%-25% till December 2008.
So widespread has the tax evasion and the subsequent erosion in VAT revenues been, that it has scuttled the phase-out plans for CST. Originally, the Centre was to slash the CST by 1% in 2009-10 and reduce it to nil in the next fiscal. But it has decided to skip the 1% cut for this year and will now withdraw the tax only when the goods and services tax (GST) kicks in (hopefully, still) on April 1, 2010.
This may prevent further incentives for those keen to evade VAT payments this year, but it doesn?t constitute a long-term anti-evasion strategy. Checks are already in place to prevent income tax evasion, but the seemingly insignificant and unglamorous cases like excise duty evasion by pan masala and gutkha manufacturers go largely un-noticed and unaddressed.
Achieving 100% tax compliance may be a pipedream, but the formulation of the GST presents a prime opportunity to tighten the loopholes. Both the Centre and the states are confident that GST collections will be bountiful as it will be more tax-payer friendly. Now, instead of haggling over its rate or threatening to stall GST?s launch (as Tamil Nadu and some BJP-run states are doing), state finance ministers should spend their time on devising adequate checks so that GST doesn?t see traders resorting to the kind of games they are playing with VAT and CST.
?surabhi.prasad@expressindia.com