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Centre, States agree on CST compensation package
January, 24th 2007
Asim Dasgupta meets Chidambaram

CST phaseout would begin from April 1, with a one per cent cut from 4 to 3 per cent. Then in a step-by-step manner taking it down to zero through a 1 per cent reduction every year.
The entire CST would get eliminated by April 1, 2010.

The Centre and the States on Tuesday converged on the elements of the compensation package for the Central sales tax (CST) phaseout from April 1 this year.

This is a progress to the earlier meeting of January 3 between the Union Finance Minister, Mr P. Chidambaram, and the VAT Panel Chairman, Dr Asim Dasgupta, when only a "broad consensus" was reached on the phasing out of CST.

"I had a meeting with the Union Finance Minister this morning followed by a detailed discussion with the empowered committee. The CST compensation package has been agreed upon (between the Centre and the States) and we have reached convergence", Dr Dasgupta told reporters here today.

Package details

The compensation package would among other things, comprise Central budgetary support as well as States eventually getting additional powers of collection of service taxes. Citing budget confidentiality, Dr Dasgupta declined to go into the details of the package.

CST phaseout

He, however, highlighted that the CST phaseout would begin from April 1, with a one per cent cut from 4 to 3 per cent and then in a step-by-step manner taking it down to zero through a 1 per cent reduction every year.

This would imply that the entire CST would get eliminated by April 1, 2010. The proposed CST phaseout roadmap is in variance with the demands of industry, which had sought reduction in CST from 4 to 2 per cent in April 1, and its elimination in April 2008.

CST collections in 2007-08 are estimated to be Rs 25,300 crore.

Currently, the States collect and retain the entire CST, which is an origin-based tax on inter-State sale of goods, The presence of CST in a destination-based value added tax (VAT) regime creates distortion and, therefore, the need for doing away with this tax.

Meanwhile, sources said that some of the States had at today's VAT Panel meeting expressed some reservations over levy of service tax on certain services such as education services.

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