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Goods and service tax stuck as Mamata Banerjee demands central sales tax compensation
April, 16th 2012

The Centre's deadline for rolling out Goods and Service Tax seems to be floundering after West Bengal chief minister Mamata Banerjee hardened her position on the Central Sales Tax compensation. A resolution of the stalemate may not be possible unless the Centre yields some ground.

The states together stand to lose 19,000 crore every year because CST rates were reduced from 4% to 2%. The Union finance ministry cleared a partial compensation package for states for 2010-11, but refused to part with a single penny for 2011-12. This has made the states cry foul.

Banerjee, in a letter written to Prime Minister Manmohan Singh on Wednesday, invoked the spirit of federalism to urge him to clear her state's dues, which amounted to 1,800 crore. "I do hope the central government will demonstrate its intent towards collective and cooperative by paying the compensation amount,'' she said in the letter.

With the Centre unrelenting so far, a meeting of the Empowered Committee of state finance ministers has been convened on April 18 to discuss the situation. Panel chairman, Bihar finance minister Sushil Kumar Modi will be meeting finance minister Pranab Mukherjee a day earlier to discuss the CST compensation to states and the delay in GST roll-out.

The meeting will be followed by a conclave in which the Empowered Committee chairman will meet the brass of the four biggest business chambers - CII, FICCI, Assocham and PHD Chamber of Commerce - in an attempt to give a clear picture on the status of the new taxation regime.

Banerjee's letter took up two issues. When CST rate was reduced to 2%, there was an understanding that there would be a compensation package for all states. In true federal spirit, the Centre cleared the due for 2008-09 and 2009-10.

The Centre, however, refused to pay the full amount to the states for the year 2010-11, arguing that they had already been allowed to generate revenue by increasing VAT rate from 4% to 5%

Banerjee rejected this argument, dubbing the amount collected as 'a notional value', which was neither 'acceptable' nor 'tenable'. Bengal was provided compensation of 240 crore in 2010-11 and stood to lose 600 crore.

Banerjee also took up the case of negative list on service tax. The Empowered Committee, she said, had unanimously decided on a negative list, which was forwarded to the Centre in due course. The budget, Banerjee lamented, had a much smaller negative list, which meant that states would not be able to tax several items.

She argued that the Centre's stance would have a "negative impact on the spirit of federalism enshrined in our Constitution.''

Banerjee's move came in the wake of letters written by the Empowered Committee chairman to the chief ministers of several states to pressure the Centre to clear CST dues.

In the letter written on March 26 to chief ministers of 17 states, including eight run by Congress, Sushil Modi asked them "to take up the matter with either the prime minister or the finance minister to continue to make full CST compensation payment to states till GST is implemented without any deduction on account of increase in lower VAT rate from 4% to 5%. In case, due to financial constraints, the Government of India is not in a position to continue to give CST compensation till GST is introduced, then CST rate may be restored to 4%.''

Modi had sent letters to Andhra Pradesh, Assam, Delhi, Haryana, Maharashtra, Meghalaya, Rajasthan and Uttarakhand - all of which are run by Congress - and West Bengal, led by alliance partner Trinamool Congress.

Identical letters were sent to Akhilesh Yadav, the newly-elected chief minister of Uttar Pradesh, J Jayalalithaa and Naveen Patnaik, who head the governments in Tamil Nadu and Odisha, respectively.

Chief ministers of Chhattisgarh, Gujarat, Madhya Pradesh, Jharkhand and Karnataka - all of which are administered by BJP - were also taken in the loop.

The Centre in consultation with states had decided to phase out CST in three years, with effect from April 1, 2007. It was then decided to roll out GST from April 1, 2010. In keeping with the roadmap, CST rate was first brought down from 4% to 3% on April 1, 2007, and to 2% on June 1, 2008. There was no reduction after that.

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