Central sales tax (CST) has become a thorny issue for India Inc, including those who do not come under the value added tax (VAT) regime. The latest to join the bandwagon for doing away with CST is the domestic petroleum industry.

Citing the special circumstances and nature of the industry, the domestic players have urged the Finance Ministry to peg the CST rate at nil on inter-state movement of all sensitive petroleum products — petrol, diesel, domestic liquefied petroleum gas (LPG) and kerosene sold under public distribution system (PDS).

The industry has pointed out that these products are prone to dual taxation — one in the originating State as CST and the other in the consuming State as local sales tax. "While the two taxes apply to products sourced by the selling company from other refineries than its own, the consumers pay only the local sales tax leaving the CST un-recovered," the industry said.

In India, refining and marketing are separate activities. The industry has highlighted that inter-state and inter-company transactions are unavoidable and are likely to continue, thereby leading to CST levies. Petroleum industry has also emphasised that removal of CST could be the first step for unifying the domestic oil market.

In its submissions to the Finance Ministry, the industry has noted that the "Irrecoverable taxes compensation scheme," which was introduced in 2002, was no longer in existence and therefore the CST levies remain un-recovered for the company. Recognising that inter-state transactions generate under-recoveries, the Government had during 2002-03 compensated CST under-recoveries through this scheme.

Although the oil industry has pitched for ‘nil’ rate of CST in the forthcoming budget, the Central Government has been indicating that it may at best allow reduction in the CST ceiling rate from the current four per cent to three per cent from April 1 next year.

Even this reduction is contingent on the States and the Centre agreeing on a compensation package for CST phase-out. Official data shows that public sector oil companies have paid Rs 75,731 crore in 2005-06 as taxes, duties, cess and dividend to the Central Government. On the other hand, PSU oil companies have paid Rs 1,25,248 crore as royalty and taxes to the State Governments. CST collections alone are estimated to be at least Rs 21,000 crore this fiscal and about Rs 25,000 crore in 2007-08. The States collect and retain the entire CST collections.