CST compensation pact clears path for Goods & Services Tax

Chidambaram

The UPA government may have crossed a major hurdle in the way of the proposed Goods and Services Tax (GST), with states agreeing to a compensation formula in lieu of the phased reduction of the Central Sales Tax.

The agreement on the compensation package, reached at a meeting here on Monday, clears the way for the proposed GST, leading to its roll-out possibly by 2014-15.

At the Empowered Group of state finance ministers meeting, besides full compensation for 2010-11, the Centre has also agreed to partly offset states' revenue loss for the subsequent two years arising from a reduction a few years ago in central sales tax from 4 per cent to 2 per cent.

Chairman of the Empowered Committee of State Finance Ministers, Sushil Kumar Modi said a sub-committee has given its recommendation for 100 per cent compensation to states for 2010-11, 75 per cent for 2011-12 and 50 per cent for 2012-13 respectively.

The Centre will have to spend Rs 34,000 crore as CST arrears over next few years, said Modi. The payout is likely to be done in a "staggered manner".

Though the Centre, in April this year, had decided against giving any compensation citing global macroeconomic uncertainties and also lower growth projections for domestic GDP growth, Modi said a provision for the same would be made in the 2013-14 Union Budget.

The sub-committee on GST design also submitted its report but no conclusion could be reached today. Though GST was originally scheduled for launch on April 1, 2010, it could not be implemented due to differences between the Centre and the states as the latter apprehended loss of revenue.

The Centre has also dropped its earlier stand that it would deduct from the compensation amount any revenue gain states may have made by increasing state-level value-added tax or VAT from 4 per cent to 5 per cent.

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