CST phase-out sees 1% cut in rate

Written by Economy Bureau | New Delhi, May 30 | Updated: Jun 1 2008, 02:38am hrs
After nearly two months of delay, the government on Friday finally notified the 1% reduction in the rate of central sales tax (CST), bringing the tax rate down to 2% from the previous 3%. The new reduced rate of CST of 2% on inter-state sales of goods will come into effect from June 1, 2008, an official release said.

The rate of CST on inter-state sale of goods to registered dealers (against Form-C) shall now be the lower of 2% and the rate of value added tax or state sales tax applicable, it added.

The rate cut follows finance minister P Chidambarams announcement in this years Budget and will further pave the way for complete phase out of the tax and the introduction of a goods and tax regime from April 1, 2010.

However, the Centre and states are yet to fully agree on the compensation package for the 1% cut, which had so far delayed the reduction process. A finance ministry official told FE, The rate cut was notified mainly due to problems faced by trade and industry which had already priced their products in accordance with the expected rate cut.

We will still have to work out the entire compensation package with states, he added.

Sources said that it has now been agreed that compensation for revenue loss to the states would be limited to the proportionate loss based on the actual collection of CST in the relevant year.

Based on this formula, states are expected to get about Rs 6,000 crore as compensation, less than half of their original demand of monetary support of Rs 13,000 crore from the Centre.