In a move that could further delay the rollout of the goods and services tax (GST), the finance ministry has decided to pay only R6,000 crore for 2010-11 as compensation to states for losses incurred in reduction of the central sales tax (CST). The government had made provision of R12,000 crore in Budget 2011-12.
According to an official in the finance ministry, states had raised value-added tax (VAT) rate for merit goods from 4% to 5% and thus generated more revenue. ?As part of the arrangement with the states, we have told them that we would deduct the CST compensation amount after they increase the lower VAT rate,? an official said.
However, this has not gone down well with the states. Speaking to FE, empowered committee of state finance ministers chairman Sushil Modi said, ?It is the prerogative of the states to increase VAT rate and this should not be linked with CST compensation. States like Orissa and West Bengal have not yet increased the VAT floor rate.? CST, a tax on inter-state movement of goods, was reduced from 4% to 3% in 2007-08, and further to 2% in 2008-09 after the introduction of VAT.
Modi said that the Centre is not abiding by its promise of compensating states on the loss of revenue due to the phasing out of CST. The CST compensation issue would be discussed when the empowered committee meets on January 9 in Bhopal. Modi will also write letter to finance minister Pranab Mukherjee on the issue.
The conflict between the Centre and states on CST compensation could derail talks on implementing GST, which is already a bone of contention. In the Budget session this year, the government introduced GST constitutional amendment Bill in Parliament for conferring simultaneous powers to the Centre and the states to levy taxes on goods and services. However, many states, mainly ruled by the BJP, are against the Centre’s imposing of VAT and other local levies, which are in their domain.
The implementation of GST has been hanging fire from the last four years and is likely to miss the April deadline. The proposed GST will subsume most indirect taxes like excise duty and service tax at the central level and VAT on the state front, besides local levies. The Constitution amendment is necessary as a number of taxes fall in the states? purview, while some come under the Centre?s ambit. To come in effect, the Bill has to be passed by a two-thirds majority in both Houses and ratified by at least 15 state Assemblies.