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CM takes up cudgels against 'low compensation' for central sales tax loss
April, 20th 2012

After the campaign against the proposed National Counter Terrorism Centre (NCTC), non-Congress chief ministers are seemingly joining hands to corner the Union government over the issue of payment of compensation to state governments for reduction in central sales tax (CST) rates.

Chief minister Naveen Patnaik shot a letter in this regard to Prime Minister Manmohan Singh on Friday, taking cue from his counterparts in West Bengal and Tamil Nadu. Earlier, Mamata Banerjee and J Jayalalithaa had supported the anti-NCTC campaign launched by Naveen.

Naveen, who met Jayalalithaa during his five-day trip to Delhi, opposed the Centre's decision to pay CST compensation to states for 2010-11 after deducting revenue gains on account of increase in the floor rate of value added tax (VAT) from four to five per cent. He also disapproved the Union government's decision not to pay CST compensation for 2011-12 and demanded that the Centre continue to compensate for CST loss without any deduction till Goods and Services Tax (GST) is not introduced. "In case this proposal is not acceptable, necessary amendments may be made in the CST Act allowing states to collect CST at four per cent as before (now it is being levied at two per cent)," he added, urging Singh to personally intervene in the matter.

Naveen said as CST is not VAT compatible, it was decided that CST would be gradually phased out from 2007-08 within three years and GST introduced from April, 2010. The Centre had agreed to compensate the states for CST loss and did the same from 2007-08 to 2009-10. It also compensated for 2010-11 but after deducting notional gain calculated on the basis in hike in VAT rate from four to five per cent, but stopped it in 2011-12. Stating that GST introduction is yet to take place, Naveen said, "Reduction of CST is a recurring loss. Hence, the central government should continue to compensate for the loss of account of CST reduction till GST is introduced." Instead, he added, the Union government has taken a "unilateral decision" not to compensate the states in disregard of the states' concerns and decisions of the Empowered Committee of State Finance Ministers. "Such unilateral decisions create a trust deficit between the Union government and the state government which may lead to a logjam in the introduction of GST," he cautioned.

Pointing out that declared goods, industrial inputs, capital goods and other essential goods are taxed at the base VAT rate, Naveen said VAT from declared goods comprises a major share of tax from the four per cent slab. In Odisha, about half of VAT at four per cent rate comes from declared goods like coal, iron and steel products, paddy, rive, pulses, cotton, groundnut and maize.

The CM criticized the Centre for not having amended the CST Act during 2010-11 to enable states to increase VAT rate on declared goods from four to five per cent. "Necessary amendment of Section 15 of the CST Act came into effect only on April 8, 2011," he noted, adding, "The rate of inflation, especially inflation of food items was very high during the last two years. Hence, the state could not enhance the rate of tax from four to five per cent during 2010-11." He said the department of revenue, government of India, has not taken into account the share of tax from the declared goods while estimating the notional gain on account of increase of the lower VAT rate from four and five per cent.

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