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April may not see 1% cut in Central Sales Tax
February, 12th 2009

Uncertainty looms large over 1% cut in central sales tax (CST) from April 1 this year. The finance ministry is examining whether to
go in for the reduction this year or eliminate it altogether when the goods and services tax (GST) rolls out in 2010.

The Centre would face a burden of Rs 6,000 crore if the CST is cut by 1% from the next fiscal, in accordance with the agreed compensation formula with the states. This would be in addition to Rs 12,000 crore in lieu of the 2% cut it is already bearing. The Centre has written to the empowered panel with regard to implementation of the other components of the formula, a government official, who did not wish to be identified, said. The final call would be taken after the committees response to its letter.

The compensation package agreed upon by the Centre and the states for CST phaseout from April 1, 2007, included VAT on imports, abolishing Form D, budgetary support, hike in VAT floor rate from April 1, 2008, transfer of power to levy service tax on certain services, and removal of additional excise duty (AED) on tobacco products and textiles.

The Centre abolished Form D that allowed government departments and enterprises to make purchases without paying VAT and removed AED on tobacco in 2007. On their part, the states have been reluctant for a hike in the floor rate of VAT or removal of AED on textiles and imposition of VAT.

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