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CST cut still taxing on compensation row
May, 02nd 2008

Uncertainty looms large over the reduction of central sales tax (CST) from 3% to 2% from May 1, with the Centre and states yet to agree on the compensation package.

CST phaseout has already missed the April 1 deadline. It was expected the empowered committee of state finance ministers and the Centre will be able to sort out differences that had arisen on the compensation package, and reduction to 2% can be carried out from May 1. The issue will now be discussed at the next meeting of the empowered committee in Trivandrum this month.

States, who stand lose close to Rs 13,000 crore if the CST is cut from 3% to 2%, are demanding that Centre compensate them in full. The Centre has agreed to full compensation but differences persist over the mechanism of compensation.

The plan is to bring down levy to 2% from April 2008 and 1% in 2009, before being eventually abolished on March 31, 2010, to pave way for rollout of unified goods and service tax from April 1, 2010.

The compensation package for the phaseout of CST which began on April 1 last year includes transfer of power to levy service tax on some services, removal of additional excise duty on tobacco products and textiles, VAT on imports, abolition of Form D, budgetary support and hike in floor rate of VAT.

Some elements of the package have been implemented. The central government has removed additional excise duty from tobacco, provided for budgetary support and transferred revenues from 33 existing services to states.

However, it is yet to bring the 44 new services under the tax net. States have ruled out a hike in VAT floor rate as it would be inflationary.

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