The states refusal is a big setback for the gas-based power projects as declared goods status would have helped them to bring down the fuel cost that has spiralled in the international markets.
Declared goods, under the Constitution, can be taxed by the states only with the Centres consent, and the rate of tax is capped under the Central Sales Tax Act 1956. In Budget, 2011-12, the Centre has raised the ceiling from 4% to 5%, and most states currently tax these goods at 5%, which is the VAT rate for merit goods.
The members of the empowered committee of state finance ministers are of the view these items (RLNG and natural gas) should not be declared goods, chairman Sushil Modi said.
Recently, the Prime Ministers Office wrote to the committee to put natural gas and regassified LNG under the declared goods category. However, states argue that they would lose revenue if these items are put in this group, since many states impose up to 12% tax on these items.
Modi, who is also Bihar deputy chief minister and finance minister, said states are concerned that the Centre was not abiding by its promise to compensate them on the revenue loss due to the phasing out of Central Sales Tax (CST). He added that states have not received much compensation for the last fiscal even though they were incurring losses due to phasing out of CST. 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 Value Added Tax (VAT).
The EC will write a strongly worded letter to the Union finance minister on CST. Not giving adequate compensation will put question mark on the credibility of the central government, Modi said.