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States to review stance on CST compensation package
September, 13th 2006
Empowered VAT panel to meet on Sept 23 The State Finance Ministers are to meet here on September 23 to review their stance on certain components of the Central sales tax (CST) compensation package over which there are disagreements with the Union Government. The meeting would take place under the aegis of the Empowered Committee of State Finance Ministers on Value-Added Tax (VAT). Measures While the Centre had proposed that the expected loss of revenue from the CST phase-out be compensated through "monetary and non-monetary" measures, the disagreement apparently is on issues such as what could be considered to be a monetary measure or a non-monetary measure. The Centre has already turned down the States' demand that they be given an additional devolution of 19.5 per cent (to make it 50 per cent) of the Centre's service tax collections. Currently, as per the tax devolution formula, the States are getting 30.5 per cent of all Central taxes, including service tax. Moreover, the States demand for choosing the three best consecutive years to ascertain the growth rate of CST collections has not found favour with the Centre. Indications are that the growth rate in the last three years up to 2005-06 (which is currently the base-year if the phase-out were to happen in 2006-07) would be taken for the calculation of the CST compensation package. There is also no agreement so far on any increase in VAT rates being counted as part of the package. Official sources said that the CST collections have been somewhat erratic in the recent years and noted that the compounded annual growth rate over the last 5-6 years have been about 12.6 per cent. In the last three years, the growth of CST has been around 18 per cent. CST collections have surged, especially in 2005-06, due to increased inter-State trade and also partly on account of reduced use of branch transfers under the VAT regime. Branch or consignment transfers may not be attractive for all industries in a VAT regime as States give input tax credit in certain cases. In Budget 2006-07, the Union Finance Minister, Mr P. Chidambaram, had said that he would return to Parliament with firm proposals, including legislative changes and a supplementary demand, as soon as the empowered committee and the Government reach an agreement.
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