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Centre must compensate for CST cut: Sushil Modi
February, 13th 2012

The grouping of state finance ministers on Goods and Services Tax (GST) will meet in the capital on March 3, to discuss the Centre's refusal to compensate states for the loss of revenue on account of reduced central sales tax (CST).

The Centre has refused compensation in the current fiscal, even as it agreed to release 6,393.94 crore for 2010-11, following the gradual lowering of CST to 2% from 4%. According to some estimates, the reduction has caused a cumulative revenue loss of 19,000 crore annually to the states.

"We are trying to talk to the central government and arrive at an amicable solution so that the states get their due,'' Bihar finance minister Sushil Kumar Modi, who heads the Empowered Committee of State Finance Ministers on GST, told ET on Sunday. "We are inching positively towards GST roll-out. Therefore, at this stage, if the government of India takes a unilateral decision, it will hamper the implementation of GST."

CST, Modi said, was reduced to 2% over three years ago. "Now the Centre has to compensate states for the loss in their revenue because of this reduction," he said. The Centre has asked all states to file their compensation claims for the previous fiscal on account of reduction in CST. It plans to do away with CST in phases to facilitate implementation of GST.

States have, however, taken objection to Centre's letter addressed to the committee chairman last month which said the compensation for 2010-11 may be considered the "final settlement." It also referred to guidelines worked out by Centre in consultation with states.

However, an official who did not wish to be named said the committee had never agreed to the payment of CST compensation for 2010-11 after deducting the amount of assumed revenue on account of the increase in the VAT rate from 4% to 5%. There were no guidelines which mentioned that any amount will be deducted after factoring in assumed revenue accruing to the states because of the increase in VAT rates, the official said.

The revised guidelines on the compensation package were worked out by the Centre and the states on August 22, 2008, the official added. These guidelines had not envisaged any further "non-monetary steps" by the states such as increasing VAT from 4% to 5%, or slapping of a tax on textile and sugar.

Moreover, several states such as West Bengal, Andhra Pradesh, Tamil Nadu and Orissa did not raise VAT rate from 4% to 5% during 2010-11, and therefore, they were strongly opposed to deducting any amount from the compensation owed to them after assuming the revenue that they would have generated had they increased the VAT rate and deducting that amount from their compensation package.

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