As part of the roll-out of proposed Goods and Services Tax (GST) regime by 2016-17, the government approved the release of Rs 33,000 crore in tranches to states and Union Territories to compensate them for revenue loss on account of phasing out of Central Sales Tax (CST) for three financial years up to 2012-13.
Government has already taken the permission of Lok Sabha to release about Rs 11,000 crore as CST compensation and in the first phase, Rs 10,800 crore is payable for 2010-11 as balance CST compensation. The total amount of Rs 33,000 crore is proposed to be released in 2014-15 and the subsequent two financial years. As per the agreement, 100 per cent compensation is to be paid for the 2010-11 financial year, 75 per cent for 2011-12 and 50 per cent for 2012-13.
The Centre collects CST and distributes it among states, but now in order to introduce GST the CST is being phased out and has been reduced to 2 per cent, from the earlier 4 per cent. Hence, the payment of compensation for the loss incurred on account of reduction in CST to 2 per cent from 4 per cent in 2010-11, 2011-12 and 2012-13, has to be made to states and Union Territories. The CST, a tax imposed on the inter-state movement of goods, was reduced from 4 per cent to 3 per cent in 2007-08 and further to 2 per cent in 2008-09 after the introduction of value-added tax (VAT).