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State firm on compensation from Centre
November, 17th 2012

Karnataka is in agreement with the Union government on the introduction of tax reforms, including the Goods and Services Tax (GST), provided the compensation due to it is paid and there is no interference in the financial autonomy of the State.

Karnataka has pressed for the continuation of the compensation approved in lieu of the proposed total abolition of the Central Sales Tax (it has been reduced over the last five years from 4 per cent to 2 per cent) which will pave the way for the introduction of the GST. This will mean that the GST will subsume a wide range of State taxes value added tax (VAT), luxury tax, entertainment tax and the betting tax.

The demand of Karnataka is also that the GST should have a band (a minimum and a maximum) and not a fixed tax. The VAT here now ranges between 5 per cent and 14.5 per cent.
Centres dues

Sources in the State government told The Hindu that it had been categorically conveyed to the Union Finance Ministry recently that the Centre should pay up nearly Rs. 1,200 crore due to Karnataka in the financial year 201011.

Further there had no been indication of the compensation that would be paid for the current year and the last year, and this should also be clarified. Of the compensation of Rs. 1,862 crore approved in 2010, the State had so far received just about a third of it, Rs. 609 crore.

It has, however, assured the Centre that it is in favour of tax reforms propounded by the Union government, particularly the proposal of Finance Minister P. Chidambaram, who is keen on introduction of GST which is pending Parliament approval.

Incidentally, Mr. Chidambaram will be in Bangalore on Tuesday to preside over a meeting of the Chief Ministers of southern States in matters relating to finance and banking.

The Union government has been keen on introducing GST, the next step in tax reforms after the introduction of VAT in 2005 and had even conveyed to the States that it will be effective from April 1, 2010. Tamil Nadu, in principle, is also stated to have agreed to tax reforms with similar conditions as that made by Karnataka.

A recent meeting on the preparations for GST was held in New Delhi, and Karnataka was represented by Additional Chief Secretary L.V. Nagarajan, who is also Principal Secretary (Finance).

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