The sticky issue of compensation to the states for the reduction in the central sales tax is widening the gulf between the Centre and states, threatening to derail the United Progressive Alliance government's most ambitious indirect taxes reform - the goods and services tax (GST).

Hardening its stance further on the issue of compensation, the Centre has said it could not go on compensating states even if they were unwilling to support the GST.

"The government can't go on compensating states even if they don't come on board for GST," Finance Secretary R S Gujral said at aFICCI post-budget conference. States are already miffed with the insignificant Rs 300 crore provided as compensation for CST in the budget 2012-13 as against an overall demand of overRs 19,000 crore.

"It seems GST has gone in limbo... the Centre is not serious about implementing GST," Sushil Modi, Bihar deputy chief minister and chairman of the empowered committee of state finance ministers had said after Union budget.

But, the war of words had begun ahead of the budget after a letter from Gujral to Modi made it clear that no more compensation was coming. States responded by demanding restoration of CST rate to 4%.

"Due to financial constraints, if the Government of India in not in position to continue to pay CST compensation to the States, then CST rate may kindly be restored to 4% from April 1, 2012," Modi had said in a letter to Finance Minister Pranab Mukherjee.

The empowered panel of state FMs will now meet in April to firm up future course of action. "I am afraid that this unilateral decision of the government,without even giving an opportunity to the states to put forward their point of view, is likely to adversely affect the process of tax reform in the country, including the introduction of GST," Modi had said in his letter.

The Centre and states had agreed to reduce the central sales tax, levied on inter-state goods sales, by 1% every year beginning 2007 and eliminate it by April 2010 when the unified GST was to be rolled-out. But the reduction in CST had to be stalled after 2009 because of the delay in implementing GST.

The compensation included allowing states to tax some services, removal of additional excise duty on tobacco products and textiles, value-added tax on imports, budgetary support and increase in floor rate of VAT. While some elements of the package were implemented, others were not implemented as negotiations on GST floundered.

The Centre has already removed additional excise duty from tobacco and transferred revenues from 33 existing services to states. However, it is yet to bring the 44 new services under tax net or impose VAT on imports.