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FM may clear sales tax compensation if states support GST
September, 25th 2012

Finance Minister P Chidambaram is likely to drive a hard bargain while deciding on central sales tax (CST) compensation to states. After the empowered committee of state finance ministers returns from its study tour of Canada and Japan this week, Chidambaram is likely to seek states support for the Goods & Services Tax (GST) in return for a CST compensation package from the Centre.

Finance ministry officials told Business Standard the Centre would provide the compensation to states only after an assurance that they would cooperate in rolling out GST. They added the Centre didnt have the fiscal space to provide thousands of crores of rupees as CST compensation; if it was willing to accommodate states demands, they should reciprocate.

A meeting of the empowered committee may be convened soon. The finance minister would meet state finance ministers to iron out issues related to GST and CST compensation. He is yet to take a final view on CST compensation, said a finance ministry official, on condition of anonymity.
CST is a tax on inter-state movement of goods imposed by the Centre, but collected by states. Earlier, states were asked to gradually phase out CST to enable the introduction of GST in 2010-11. The Cabinet had approved a formula to compensate states for losses resulting from a cut in the CST rate, till 2009-10. As the GST roll-out was delayed, states demanded the Centre provide compensation for a longer period 2009-10.

Though the Centre had allocated only Rs 300 crore towards CST compensation in Budget 2012-13, states have pegged the losses for 2010-11 at Rs 19,000 crore. Before quitting as finance minister, President Pranab Mukherjee had cleared a compensation package to states, after states threatened holding back the money could jeopardise the GST rollout. The issue was then referred to Prime Minister Manmohan Singh, who was in charge of the finance portfolio for a short period after Mukherjees departure from North block. It is understood the Prime Ministers Office (PMO) had questioned the move, citing the countrys rising fiscal deficit, which is already expected to overshoot the Budget Estimate.

Though the finance ministry may approve the CST compensation, the funds may not be released before Budget 2013-14. Also, states support for GST may only help the Centre secure parliamentary approval for the required Constitutional Amendment Bill by the end of this year. Currently, the matter is being examined by a parliamentary panel.

After the Constitutional Amendment Bill is cleared by a two-thirds majority in Parliament and vetted by half the states, the GST legislation would have to be cleared by Parliament and the legislative assemblies of each state, officials said.

Recently, Chidambaram had said he was hopeful an agreement with the empowered committee of state finance ministers would be reached soon. I had one meeting with (empowered committee chairman) Sushil Modi. I have sought another meeting with him, as well as the full committee. If we can complete the exercise by October 15, there is no reason to assume there wouldnt be an agreement, he had said.

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