In the forthcoming union budget, the sates are likely to get around Rs 12,000 crore as compensation for losses they have incurred on reduction in central sales tax (CST) rate. However, the Centre and States are yet to agree on the mechanism. This move by the government could be seen as another positive development for the introduction of Goods and Services Tax (GST), which could send a clear signal to the states that centre will address their concerns.
During the meeting between Union Finance Minister P Chidambaram and the Empowered Committee of State Finance Ministers, Chidambaram assured that he will make a provision towards compensation for 2010-11. However, finance minister did not specify the quantum of provision in the budget. Approximately Rs 34,000 crore is to be given, which will compensate CST losses of states for three years beginning 2010-11. It includes 100 per cent compensation for 2010-11, 75 per cent for 2011-12 and 50 per cent for 2012-13.
As per Chidambaram, the GST legislation could be brought in by December this year and if the GST implementation takes a longer time then the government will revisit the CST compensation issue again or look at reverting to original CST rate of 4 per cent. While, on the contours of the new tax, Chidambaram is keen to unveil some steps in indirect taxes structure in the coming budget and also give a time frame on its roll-out.
CST is levied on inter-State trade. Since there is no final date for the introduction of GST, states are now seeking clarity on CST compensation for 2013-14. Some States sought 100 per cent compensation, while some others wanted a rise in CST to four per cent. Earlier, the centre and states had agreed to phase out CST from April 2007 over a period of three years. Accordingly, the CST rate was reduced in two phases to two per cent from four per cent, while the reduction plan was put on hold after the financial crisis of 2008.
