In ANOTHER twist to the row over the central sales tax (CST) compensation, a few states have now come up with a new formula: raise the tax to the original 4% and retain it at that level till the Centre is in a position to compensate states for the revenue loss arising from the proposed phasing out of the tax.
Speaking to FE, the chairman of the empowered committee (EC) of state finance ministers, Sushil Modi, said that Maharashtra had suggested that if the Centre is unable to compensate states on revenue loss, then raising CST rate to 4% from the current 2% could be considered and CST could be eliminated when the Goods and Services Tax (GST) comes into effect.
“The empowered committee will take a view on the issue when it meets on March 3,” said Modi.
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. Raising it again to 4% is likely to be seen as a retrograde step by tax experts and could lead to further delays in implementing GST.
The fresh controversy has been triggered by a letter written by revenue secretary RS Gujral to EC, saying that states will not be compensated for 2011-12. Besides, the revenue secretary has said that states won’t get compensation beyond the R6,000 crore already disbursed for 2010-11, Modi said.
FE had reported on December 21, 2011, that the finance ministry has decided to pay only R6,000 crore for 2010-11, while the states? demand is of R19,000 crore. The government had made a provision of R12,000 crore in Budget 2011-12. According to an official in the finance ministry, states had raised the value-added tax (VAT) 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,” the official said.
However, the EC chairman has countered this view. “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,” he said.
When the state finance ministers raised the issue of CST compensation in the pre-Budget meeting in January, Union finance minister Pranab Mukherjee asked the state representatives to stick to the pre-Budget consultation and assured that the issues would be discussed at a separate meeting to be convened sometime in February.
“We have not yet received any communication for the meeting from the Union finance ministry,” Modi said.
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 last year, the government introduced the GST constitutional amendment Bill in Parliament for conferring simultaneous powers to the Centre and states to levy taxes on goods and services. However, many states, mainly ruled by the BJP, are against the Centre’s imposing VAT and other local levies that are in
their domain. GST has been hanging fire for the last four years and would 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 under 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.