Compensation pact on CST clears way for GST

Written by Gireesh Chandra Prasad | Gireesh Chandra Prasad | New Delhi | Updated: Jan 29 2013, 11:26am hrs
Despite fiscal constraints, the Centre has agreed to make a significant concession in compensating state governments revenue loss on account of the reduction in the central sales tax (CST). The agreement reached at a meeting in Bhubaneswar on Monday clears the way for the proposed goods and services tax (GST), leading to its roll-out possibly by 2014-15.

Sushil Modi, deputy chief minister of Bihar, who chairs the empowered committee of state finance ministers, described to FE the outcome of the panels deliberations attended by finance ministry officials as a major breakthrough. Besides full compensation for 2010-11, the Centre has also agreed to partly offset states revenue loss for the subsequent two years arising from a reduction a few years ago in central sales tax from 4% to 2%. Modi said the Centre has agreed to full CST compensation for 2010-11, offset 75% of states CST losses in 2011-12 and 50% for 2012-13. This means, tentatively, the Centre will have to shell out about R34,000 crore for compensating states on this account for the three years.

Significantly, New Delhi has also dropped its earlier stand that it would deduct from the compensation amount any revenue gain states may have made by increasing state-level value-added tax or VAT from 4% to 5%.

The stalemate on GST for two years on account of the disagreement on compensation has now ended, said Modi, adding that the the central government and the empowered committee have approved the suggestions by a subcommittee chaired by Union revenue secretary Sumit Bose on the issue. States want to be compensated for reduced revenue due to the lowering of CST levied on inter-state movement of goods from 4% to 3% in 2007-08, and further to 2% in 2008-09. CST is supposed to be reduced to nil once the GST is in place, as the former is considered to be incompatible with the destination-based VAT on consumption which the GST is.

The government of India has decided to compensate states for reduced CST revenue as per the August 22, 2008, guidelines, which do not take into account whether some states have raised value-added tax from 4% to 5% or not, Modi said.

Finance minister P Chidambaram recently said that he planned to introduce some amendments to the GST constitutional amendment Bill during the winter session of Parliament and was hopeful it would be passed in December. With the thorny issue of CST compensation having been thrashed out, the structure and powers of the proposed GST council, the rates of GST (which will have Centre and state components) and the threshold where the tax would kick in are to be discussed by the empowered committee on Tuesday. The sub-panel mentioned above had made certain recommendations on these aspects.

As a revenue raising measure, some states had increased their VAT rate from 4% to 5% three years ago, which prompted the Centre to deduct any gains from such increase from the compensation due to those states.

Thus, states were given only Rs 6,393 crore for 2010-11, about a third of what they had demanded. Now, states will not be discriminated based on the rate of VAT they levy.

New Delhi, however, promised to pay the compensation in a staggered manner, without explaining the time table. State finance ministers said they would like the entire compensation to be disbursed in 2013-14 itself but agreed to the proposal, fully aware the fiscal constraint of the central government, said the empowered committee chairman. Manufacturing states, however, have suggested that if the central government cannot fully compensate them, the CST rate, now at 2%, should revert to 4%. CST is collected by the Union government, but goes to states.

State finance ministers have also demanded a provision to compensate state for any revenue loss for five years once GST comes into force as had been done when VAT was introduced.