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Cabinet may consider CST compensation package today
February, 22nd 2007
The Cabinet Committee on Economic Affairs (CCEA) is likely to take up for approval on Thursday the compensation package to be given to the States for the proposed phase-out of the central sales tax (CST).

In the first week of January this year, the Centre and the States had reached a "broad consensus" on the phasing out of CST on the basis of full compensation package for the revenue loss of the States.

While the exact contour of the compensation package is likely to be announced 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, Central budgetary support, if required, would also form part of the proposed package.

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

Ceiling rate

The ceiling rate on CST is likely to be cut from 4 to 3 per cent from April 1 this year. The CST is likely to be eliminated by 2010, when goods and services tax (GST) is to be introduced.

Currently, the States collect and retain the entire CST, which is an origin-based tax on inter-State sale of goods. Removal of CST would have huge revenue implications and hence the demand for full compensation. In fiscal 2007-08, the CST collections are estimated to be about Rs 25,300 crore.

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