The Government of India has decided to phase out compensation given to states against Central Sales Tax (CST) loss from 2011-12, a move that is perceived to queer the pitch for roll out of the proposed Goods and Service Tax (GST).

The overall compensation for all state governments was worked out at Rs 15,000 crore for 2011-12. With economic growth projections on the downside amid global macroeconomic uncertainties, the Centre is not keen on straining its resources by doling out compensation to states.

The Union finance secretary has informed Sushil Modi, the chairman of the empowered committee of finance ministers on GST that from 2011-12 onwards, the Centre will not be compensating states against CST loss. This is going to set a wrong signal to all states that have been vehemently demanding full compensation against CST loss. In a way, it is set to pose a huge bottleneck for GST roll out as there was consensus among all states that the Centre would offset CST loss fully till the Integral GST Mechanism is well established, a senior state government official told Business Standard.
Of the total CST loss to the tune of Rs 12,000 crore incurred by all states, the Centre has disbursed only Rs 6,394 crore. It has also categorically stated that the matter is settled for 2010-11 and the left over loss of states that have not raised base VAT (value added tax) from four to five per cent will not be compensated.

For 2009-10, the Government of India (GoI) had decided to compensate 68 per cent of the loss. The GoI's reluctance to offer full compensation is understood to have caused much heartburn among the states.

The Orissa government is also peeved over pending Rs 260 crore loss against CST for 2010-11 which the Centre was supposed to compensate.

The latest communication from the Centre implies that this loss will no longer be compensated. This is unjustified. The state government had urged the Centre for providing full compensation against CST loss in the last meeting of the empowered committee of state finance ministers held in Bhopal last month, added the official. Orissa had claimed Rs 380.17 crore as compensation towards loss on account of CST reduction for 2007-08 of which the GOI had sanctioned Rs 137.02 crore. Similarly, for 2008-09, the GoI had sanctioned Rs 425.40 crore as against a compensation claim of Rs 483.29 crore by the state government.