Compensation pact on CST clears way for GST

Jan 29 2013, 05:56 IST
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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.

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.

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