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CST phaseout: States decide on compensation package
December, 13th 2006

State Finance Ministers under the aegis of the VAT Panel on Tuesday decided on the compensation package that they would formally demand from the Centre for the proposed phase-out of Central sales tax (CST) from April 1 next year.

The package would include additional powers to States on service tax (raising devolution share on service tax and giving States the power to tax certain services), power to levy VAT on imports, bringing certain additional excise duty (AED) items under VAT and some relaxation on `declared goods.'

States would also insist on Budgetary support as part of the compensation package to tackle fall in revenues from other elements.

Collections from CST, which is an origin-based tax on inter-State sale of goods, are projected to touch Rs 25,000 crore in 2007-08.

Indications are that the States would demand the power to levy VAT on tobacco, currently an AED item, and seek removal of four per cent ceiling rate on `declared goods.' The VAT rate on tobacco, if levied, is likely to be more than 12.5 per cent as it is a demerit item.

"Some of the demands that we are going to make require legislative changes," said Mr Asim Dasgupta, Chairman of the Empowered Committee of State Finance Ministers on VAT.

"As things stand, I am optimistic that the CST phase-out would begin from April 1 next year. Some differences with the Centre on the compensation package are there and these have to be ironed out."

The VAT Panel Chairman would meet Finance Minister Mr P. Chidambaram in the first week of January to take forward the issue of the compensation package.

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