The empowered committee of state finance ministers will take a final call next week on phasing out central sales tax (CST) from October 1.
With both the Centre and states failing to find a common ground on the compensation package for states, the reduction of CST from 4% to 3% from October 1 looks set to become a casualty.
While states want devolution of 50% of revenues collected by way of service tax to them, the Centre has baulked at the suggestion. At present states get 29.5% of proceeds of all central taxes including service tax.
States also want to impose value added tax (VAT) on imports besides the right to collect service tax on financial and telecom services. While the Centre is agreeable to services like legal and medicine, it is not ready to give away financial or telecom services. Telecom accounts for more than 40% of the total service tax collection.
The Centre has asked states to hike VAT rate from 4% to 6%. States impose 4% VAT on industrial intermediates. This suggestion has also not found favour with states as they feel any decision to change the rates is their prerogative.
States have claimed they would lose Rs 2,500 crore in revenue this fiscal, if the CST is brought down from 4% to 3%. The loss on account of further 1% reduction is pegged at Rs 12,000 crore. As per the roadmap, states are supposed to cut CST by 1% from April 1, 07 to 2%.
The matter is being sorted out by a committee comprising the adviser to finance Minister Parthasarathi Shome and joint secretary to empowered committee Satish Chandra.
The committee was set up in August this year to iron out differences and work out a future roadmap. Finance minister P Chidambaram had said last week that certain differences were still there and another meeting would be required to sort them out.