The Centre and states will attempt to break the logjam over the compensation for reduction in central sales tax (CST), an issue that is threatening to derail the United Progressive Alliance government's ambitious indirect tax reform of goods and services tax.

Finance Minister Pranab Mukherjee will meet Sushil Modi, Bihar deputy chief minister and chairman of empowered committee of state finance ministers, on April 17 to thrash out the contentious issue.

"The issue of CST compensation will be on the agenda," said a government official.

States and the Centre had reached a deal in 2006 to cut CST, levied on inter-state sale of goods, by 1% every year beginning April 1, 2007 and eliminate it by April 1, 2010 to coincide with launch of GST.

The centre was to compensate the states for the loss on revenue on account CST phase out.

A delay in implementation of GST due to lack of support from the states over the issue of its structure and the global financial crisis prompted a pause in the phase-out plan.

State governments are upset with provision of mere 300 crore as compensation towards CST in the budget 2012-13 as against their overall demand of over 19,000 crore.

They have demanded that the Centre should either pay the compensation or restore the rate of tax to original level of 4%.

West Bengal chief minister Mamata Banerjee and Tamil Nadu chief minister J Jayalalithaa have terms the Centre's decision to discontinue compensation for the tax, levied on inter-state goods sales, as unilateral and arbitrary.

The Centre on its part has made it clear that it could not endlessly compensate states for CST reduction if they kept dithering on the structure of the goods and services tax (GST) leading to the delay, a charge strongly refuted by the states.

"Since it is the government of India's responsibility to introduce GST by evolving a consensus and by putting in place appropriate mechanisms, the states cannot be expected to bear the loss on account of its failure to introduce GST. The government of India has a moral responsibility to compensate the states till GST is introduced," Jayalalitha said in a letter to Prime Minister.

"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 to Mukherjee.