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State govts to insist on higher share of CST compensation
December, 03rd 2012

State governments will insist on guidelines entitling them to a higher share of central sales tax (CST) compensation in a crucial meeting later this week with the centre over implementation of the goods and services tax (GST).

States will insist that the same guidelines of 22 August 2008 should continue. In those guidelines, there was no mention of any reduction in CST payout due to increase in VAT (value-added tax) rates by states, said Sushil Modi, chairman of a panel of state finance ministers. States want that they should be compensated for their losses.
States want that the CST payout should not be reduced because some of them have increased VAT to 5% from 4% or because additional revenue accrue to them as they levy tax on items such as sugar, tobacco and textiles, said Modi, who is the finance minister of Bihar.

The meeting, scheduled for 5-6 December, will also discuss the design of GST, which has been a major bone of contention between the Centre and the states.

While most states have increased the concessional VAT rate to 5% from 4% (levied on certain items including sugar, raw materials, computers), some have also raised the general rate of 12.5% (also known as the revenue neutral rate).
Finance minister P. Chidambaram has agreed in principle to the states demand for payment of central sales tax compensation, but the guidelines for the compensation have to be worked out by his ministry.

There is a broad revenue foregone figure for CST compensation. We need to see what has to be deducted from this figure. States levy VAT on sugar, tobacco and some have even raised the tax rate to 5% from 4%, said a finance ministry official, who did not want to be identified. The Centre deducted these figures while paying out the compensation for 2010-11, which has been contested by the states, who have always insisted that these figures should not be considered while calculating CST compensation.

Determining the CST compensation is a complex exercise, said Pratik Jain, partner at consultancy firm KPMG. While calculating the figure, it is important that not only the CST rate reduction is taken into account but also the increase in state revenue due to increase in VAT, he said.

Last month, at a meeting between Chidambaram and state finance ministers it was decided to constitute two committees having representatives from Central and state governments to evolve a design for GST and address the contentious issue of non-payment of CST compensation.

The committees were asked to submit their report by 31 December. A final decision is expected to be taken at a meeting of the empowered group of state finance ministers in January.

Both Modi and the finance ministry official said the compensation guidelines may be finalized in the first meeting itself, though a consensus on the design of GST may take longer.

The finance minister has been flexible on most of the contentious issues. It is possible that the states demand of having the SGST rate (GST rate to be levied by states) in a band and doing away with dispute resolution panel could be agreed to, the official said. All decisions will then be taken by (the) GST council and the Centre will have no veto powers. But Centres voting share will have to be decided.
A consensus could give a push to GST, Indias most far-reaching tax reform that aims to integrate the country into a common market.

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