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Central sales tax ceiling rate may come down to 2%
April, 08th 2008
Notification only after agreement on compensation issue


We feel that what (compensation package) they (States) agreed for last year is applicable even this year and the subsequent years. But they dont think so.


Reduction of Central sales tax (CST) ceiling rate from 3 per cent to 2 per cent may soon become a reality, with the Centre and the State Governments set to meet on Tuesday to sort out the thorny issues on compensation for the revenue losses that may arise to the States from such a move.

Official sources said that the Finance Minister, Mr P. Chidambaram, and the Chairman of the Empowered Committee of State Finance Ministers on Value Added Tax (VAT), Dr Asim Dasgupta, are to hold consultations on the compensation issue here on Tuesday. Prior to this, the State Finance Ministers are to meet under the aegis of the Empowered Committee. Indications are that the VAT panel would internally discuss this matter before meeting the Finance Minister.

Although Mr Chidambaram had announced in the Budget 2008-09 that the CST ceiling rate was proposed to be brought down to 2 per cent from April 1, the actual notification is yet to be issued by the Finance Ministry.

Compensation package

Official sources pointed out that the Budget had made it clear that the new CST rate of 2 per cent would be notified only after an agreement was reached between the Centre and the States on the compensation issue. Trade and industry is awaiting the notification of the CST ceiling rate cut.

While the Centre contends that there was no need to tinker with the compensation package agreed to by the States last year, the States have taken a stand that the compensation package needs to be negotiated afresh.

The strong economic growth and the resultant surge in CST collections had prompted the States to demand a revised compensation package.

We feel that what (compensation package) they (States) agreed for last year is applicable even this year and the subsequent years. But they dont think so. That is the main issue, sources said.

Currently, the States collect and retain the entire CST, which is an origin-based tax. CST has been a massive revenue generator for the States, but is being viewed as incompatible in a VAT regime and hence the move towards its phase-out.

The CST rate was brought down from 4 per cent to 3 per cent on April 1, 2007.

Meanwhile, tax revenues of VAT-implementing States registered a 13.4 per cent increase during April-December 2007 to about Rs 1,19,000 crore.

In fiscal 2006-07, the tax revenues of VAT implementing States grew 21 per cent.

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