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States seek fair compensation for central sales tax phase-out
July, 12th 2012

States have threatened that they might adopt anti-tax reform measures if compensation for phasing out central sales tax (CST) is not paid.

They have sought the intervention of the Prime Minister, Dr Manmohan Singh, who also holds the Finance portfolio, to sort out this issue.

CST, levied on goods traded across States, has been reduced from 4 per cent to 2 per cent. As a precursor to the implementation of the Goods and Services Tax (GST), it was decided to phase out CST, for which compensation was to be paid to the States.


The Chairman of the Empowered Committee of States, Mr Sushil Kumar Modi, in a recent letter to Dr Singh, said: I am afraid that the unilateral decision of the Government of India regarding CST compensation, without even giving an opportunity to the States to put forward their point of view as requested by them, is likely to adversely affect the process of tax reforms in the country, including the introduction of Goods and Services Tax in India.

In case CST compensation is not given by the Government till GST is introduced, the States will face substantial revenue losses and may be forced to adopt certain tax measures that may not be in the interest of tax reform, he added. Mr Modi is also the Deputy Chief Minister and Finance Minister of Bihar.

The Central Government, in consultation with States, had decided that CST would be phased out beginning April 2007 over a period of three years. The CST rate was accordingly reduced from 4 per cent to 3 per cent with effect from April 1, 2007. Guidelines for compensation were framed in 2007 and revised in 2008.

But the States claim that the revised guidelines do not envisage any further non-monetary steps by them, such as increasing the value-added tax rate of 4-5 per cent or imposing tax on textiles and sugar. As per the guidelines, States were paid CST compensation for 2007-2008, 2008-2009 and 2009-2010.


However, the Union Finance Secretary informed the Empowered Committee in February this year that 2010-11 was the last year of compensation.

Accordingly, Rs 6,393.94 was released. But States were not satisfied and requested the Centre to reconsider the matter.

They also demanded that, in case there is no further compensation, the CST should be raised to the original level of 4 per cent till GST was introduced.

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