Centre offers 50% compensation to bear Sales Tax losses to states

The central government today decided to offer 50% of the total revenue loss arising due to the reduction in the Central Sales Tax (CST) as compensation to the states.

The Empowered Committee of State Finance Ministers was asked by the Finance Minister Pranab Mukherjee to design a package comprising 50% compensation from the centre and the other
50% burden to be shared by the states for the losses arising as a result of the cut in sales tax.

However, the Finance minister’s new proposal comes with a rider where States will be required to levy VAT on sugar and textiles. Presently none of the states have levied VAT on the products.

The estimated arrears and this year’s losses add up to Rs 14,000 crore. Rs 5,000 crore of which will be transferred to the states from tax on 33 services. The remaining revenue loss is around Rs
9,000 crore of which the centre has agreed to offer Rs 4,500 crore to the states. As the Goods and Services Tax (GST) is set to be implemented, the states want the centre to completely phase out CST while offering adequate compensation for revenue losses.

In the process of phasing out CST, the government has reduced the rate from 4 per cent in 2006-07 to 3 per cent in 2007-08 and to 2 per cent in 2008-09. According to the proposal pt on hold, the rate was to further reduce to 1 per cent from April 1, 2009, completely phased out from April 1, 2010.

The second day of meetings did not give any result relating to the implementation of GST as states express concern over its rate.

The finance minister said, “We will meet by the month-end and hope to finalise the date and the rate of GST.”