Compensation pact on CST clears way for GST

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SummaryDespite 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.

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 panel’s 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

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