As differences between the Union finance ministry and the states over compensation for revenue loss due to cut in Central Sales Tax (CST) came to the fore, the latter on Saturday raised questions over the Centres credibility to keep its word on compensation for even Goods and Services Tax (GST).

This may mar prospects of the beleaguered indirect tax regime, which has already missed two deadlines, and is close to missing another one.

About a month after the finance ministry refused to provide any further compensation to the states for losses on account of reduction in CST, states asked the Centre to either provide them the full compensation till GST is introduced or be prepared for an increase in the CST rate to four per cent from two per cent at present.
On January 27, finance secretary R S Gujral had written to the states saying the compensation provided so far should be considered as full and final and they should consider 2010-11 as the last year for CST compensation.

Though CST compensation is not directly linked to GST, states said such a move by the Union government was against the spirit of GST and would lead to its loss of credibility.

The states are upset with the letter from the finance secretary. Without resolving issues with the states, the Centre has unilaterally taken this decision. If the Centre is not willing to give any further compensation for CST then the two per cent CST rate should go back to four per cent, said Sushil Modi, chairman of the empowered committee of state finance ministers, on Saturday.

CST, a tax on inter-state movement of goods, was reduced from four per cent to three per cent in 2007-08, and further to two per cent in 2008-09 after the introduction of Value Added Tax (VAT). Due to delay in GST implementation, states have asked for compensation further for 2010-11 and 2011-12.

CST is considered distortive for the concept of common Indian market, envisaged to be created first by state-level VAT and now GST. When VAT was introduced from April 1, 2005, CST was conceptualised to be phased out. However, still two per cent CST remains and if it is again raised to four per cent, the whole idea of common market may take a beating.

CST rate could be reduced by the Centre as it falls under the central legislationCST Act. However, the Centre only collects it but distributes it to the states.

The government had made a provision of Rs 12,000 crore in the Budget this year for CST compensation for 2010-11. However, it gave a compensation of only Rs 6,393 crore, which is 33 per cent of the claims of Rs 19,000 crore submitted by states. Many states like Haryana will incur loss of Rs 2,000-3,000 crore if the CST compensation is not given.

The question is when GST is implemented whether the Centre will be able to fulfil its commitment. This can create hurdles, Modi said. He added it was not possible for the states to go on incurring losses on their revenue since GST rollout was nowhere in sight.

The Union finance ministry had earlier assured states of compensating them fully on account of revenue loss after GST is implemented.

States are suggesting that the formula used for calculating compensation for loss of CST revenue for 2007-08 to 2009-10 should be followed for working out the compensation payable for 2010-11 as well. On the other hand, the Centres view is that the compensation was initially envisaged only for three years.

The Centre cannot blame states for delay in GST rollout. Such huge tax reforms take time, Modi said, and added the committee had written to the Finance Minister to express its concerns.

GST was originally supposed to come from April one, 2010. But it is all set to miss even April one, 2012 timeframe. A constitution amendment bill on GST is pending with Parliament standing committee on finance and its chairman Yashwant Sinha had said the panel would take up the bill after Direct Taxes Code (DTC). The committee is expected to submit its report on DTC next week.

On the issue of the governments decision to allow airlines directly import Aviation Turbine Fuel (ATF), the states said over Rs 2,500 crore of revenue will be affected due to this. States such as Maharashtra, Andhra Pradesh, Delhi and Tamil Nadu will take a hit. States have opposed this too.