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Cabinet clears CST phase-out proposal
February, 23rd 2007
Paves way for significant tax reform measure


Details
The compensation package is expected to comprise both monetary and non-monetary measures.
It would include the transfer to the States of the total service tax revenues on certain identified services.
The Central budgetary support, if required, would also form part of the proposed package.

The Union Cabinet on Thursday gave its nod for initiating the process of Central sales tax (CST) phase-out, with a reduction in the ceiling rate from 4 to 3 per cent from April 1. A Bill Taxation Laws (amendment) Bill 2007 would be introduced for this purpose in the coming Budget session of Parliament, the Union Parliamentary Affairs Minister, Mr Priyaranjan Dasmunshi, told reporters here on Thursday.

"This (CST phase-out) will mark the beginning of the process of a very significant tax reform measure, which is critical for success of VAT and for introduction of GST in future. This will facilitate the process of developing a national common market," Mr Dasmunshi said.

The Cabinet is also understood to have given its nod for the compensation package to be given to the States for revenue loss on this account.

Compensation package

The compensation package is expected to comprise both monetary and non-monetary measures.

For this purpose, necessary amendments are to be made to the Central Sales Tax Act, 1956 and the Additional Duties of Excise (Goods of Special Importance) Act, 1957.

Package details

The details of the compensation package are likely to be introduced in the forthcoming Budget. Indications are that the package would include the transfer to the States of the total service tax revenues on certain identified services.

Moreover, the Central budgetary support, if required, would also form part of the proposed package.

The Centre is likely, in the first year, to collect service tax on 77 identified services and pass on the entire proceeds in the form of cash to the States towards the CST compensation. The States are also expected to get the power to levy VAT on all tobacco and tobacco items.

Meanwhile, the State Finance Ministers met here on Thursday under the aegis of the Empowered Committee of State Finance Ministers on Value Added Tax (VAT). The Chairman of the VAT Panel, Dr Asim Dasgupta, later met the Union Finance Minister, Mr P. Chidambaram, to discuss the CST compensation package.

Currently, the States collect and retain the entire CST, which is an origin-based tax on inter-State sale of goods.

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