Draft Report of the High Level Group on Services Sector

7.2.4 Fiscal Issues
7.2.4a Variations in taxes at State Level
For maximum benefit to the consumer the retail trade chains must operate in several States or preferably on a pan-India basis. Any tax on interstate movement such as the Central Sales Tax constrains retail operations as the supplies have to be sourced within the State to avoid the tax. Differences in the levels of State taxes also lead to the same results and the retail chains are unable to avail of economies of scale that could be reaped from the centralized procurement of merchandise. Similarly the benefit of backward supply linkages developed in one State gets circumscribed to that State. Octroi or entry taxes levied by the municipal bodies exacerbate the position. Differences in the level of taxes also impost costs on retail operations as the goods have to be priced differentially in various State jurisdictions.
Fortunately the fiscal reforms introduced in recent years are likely to ease the situation in the near future. Phase-out of the Central Sales Tax has commenced and there will be no tax on interstate movement with effect from 31 March 2010. State VAT was introduced by most States with effect from 1 April 2005 and other States have been gradually falling in line. After the decision made lately by Uttar Pradesh all States have agreed to introduce State VAT. This will bring in uniformity in internal taxation of most goods in the country and facilitate retail operations. The Government of Maharashtra has recently decided to withdraw octroi in Mumbai.

The decision in principle to introduce Goods and Services Tax (GST) on 1 April 2010 to integrate all indirect taxes on goods and services at the central and state levels is another positive development for retail trade. A dual tax structure, one at the state level and the other at the central level is likely to be established at the beginning of the financial year 2010-11. The eventual establishment of GST would lead to a quantum improvement in the efficiency of the retail sector