Earlier, the Centre used to collect AED on sugar, textiles and tobacco and used to give one per cent additional devolution from the Centre’s tax in lieu of these taxes to the states.
However, on the recommendation of the 12th Finance Commission, the Centre had stopped levying AED on these three items from 2006-07.

After that, states started imposing VAT on tobacco, but sugar and textiles were not taxed. The reason was the Centre still used to give one per cent devolution to states till 2010-11. That devolution was stopped from this fiscal, said Modi. Also, sugar and textiles were taken out of schedule of AED only from this fiscal, Deloitte Senior Director Prashant Deshpande told Business Standard.

He said if large sugar producing states like Maharashtra and Uttar Pradesh started imposing VAT on sugar, it would definitely have an upward pressure on inflation of the sweetener.

Currently, only Tamil Nadu, Andhra Pradesh and Orissa impose AED on sugar and textiles. Modi said states would impose VAT on these two items at four or five per cent, depending on lower rate of VAT in the states.

When asked whether VAT on textiles and sugar would result in making these two items costlier, Modi said imposing tax on them is the right of states. “If we do not impose this tax, where from are we going to collect money to build roads, etc,” he said.

Modi said the Centre had collected Rs 1,220 crore from AED on sugar and Rs 2,300 crore on textiles during 2005-06, after which this levy was dropped. According to official data, inflation for September eased marginally to 9.72 per cent in September from 9.78 per cent in the previous month.

The rate of price rise in sugar rose to 7.45 per cent from 6.28 per cent and that of man-made textiles to 7.23 per cent from 5.96 per cent.

However, inflation in cotton textiles declined from 12.55 per cent from 16.86 per cent.

Modi said states’ tax collections have started showing an impact of slowdown. Average VAT and non-VAT collections grew 20 per cent in the first half of this fiscal in states, lower than figures in the the corresponding period of the previous years, he added.

He said states were angry over the Centre’s dilly-dallying compensation to states over cut in Central Sales Tax (CST), which is a levy in movement of goods between states.

CST that was imposed at four per cent was reduced to two per cent in phases when VAT was imposed from 2005-06. He said out of Rs 12,000 provided for states in this fiscal’s Budget, only Rs 900 crore was given, most of which was for the last fiscal. “If the Centre backs out of its commitment on CST compensation, how can we trust it on GST compensation,” he added.

The Goods and Services Tax is proposed to come some time next fiscal. But states’ decision to impose VAT on textiles and sugar from April 1 indicates the indirect tax reform will not be coming from the start of next fiscal.

Modi also said state finance ministers discussed experience of their visit to Europe last month. Unlike popular perception of single tax rate, Europe has a number of GST rates, he added.

Europe has a band of GST rates, but the Finance Ministry’s proposal is for single rates of 10 per cent each for the states and the Centre in case of goods, eight per cent in case of services and six per cent in case of lower rate of goods tax, he said.

Source: Business Standard, India,  dated 15/10/2011