The deadlock over central sales tax (CST) compensation continued, with the Centre and states unable to reach an agreement at their meeting last week. The meeting, held on 5-6 December, was aimed at ensuring a faster rollout of the goods and services tax (GST) by resolving the concerns of the states over CST payouts and the design of this indirect tax reform.

While state governments insisted on higher payouts of CST compensation, the central government said that the payout should reflect the increased revenue accruing to states on account of an increase in tax rates and a wider base, according to two government officials.

The two sides will meet again on 18-20 December to look for a mutually acceptable formula. The meeting will also take forward discussions over the design of GST, including issues such as having state GST rates in a band, decision-making powers to be vested with the GST council and the need for a veto power for the Centre.

The central government has offered to pay 75%, 50% and 25% of the compensation figure arrived at as per the guidelines of 2008 in 2010-11, 2011-12 and 2012-13, respectively. States, on the other hand, are demanding that they be paid 100%, 75% and 75%, respectively.

States are demanding a full payout for 2010-11, but the Centre wants to pay only 75% of the amount (Rs.15,000 crore). Of this, around Rs.6,400 crore has already been released to the states, said a government official who didnt want to be identified.

As part of the transition to GST and the gradual phase-out of central sales tax, states had cut CST to 2% from 4% with the central government compensating states for the revenue forgone. But the Centre, in January, had refused further payouts on account of lack of progress on GST.

For 2011-12, states want around Rs.13,500 (75% of Rs.18,000 crore), while the Centre is willing to pay only Rs.9,000 crore, said the official cited above. In the next meeting, for a consensus, the Centre may have to revise its offer upwards while states may have to climb down from their stance.

States do not want CST payouts reduced because some of them increased value-added tax (VAT) to 5% from 4%. They also do not want the Centre to take into account the additional revenue accruing to states because of taxes on items such as sugar, tobacco and textiles.

Another government official said the finance ministry will see how the meetings on design goes before deciding on compensation.

This time, the meeting of GST design is before the meeting on CST compensation unlike last time. This will give the central government more leverage in getting its way in some design issues, he said.

GST is potentially one of Indias most far-reaching tax reforms. It aims to unite the country into a single market by removing all barriers between states. But its implementation has been held up because of issues between the Centre and states about the final architecture of GST. But with P. Chidambaram being made finance minister on 31 July, the government has adopted a flexible stance and is likely to accede to states demands to have rates in a band and doing away with the dispute resolution panel.

There is at least a keenness on the part of the Centre to try and create a consensus with states on key issues like CST payouts and design, said Harishankar Subramanian, partner and national leader, indirect tax services, at audit and consultancy firm Ernst and Young.

The two committees on GST design and CST compensation, set up by Chidambaram last month after his meeting with the empowered committee of state finance ministers, are expected to submit their reports by 31 December.