CST Relief: States Disagree On Compensation Formula

Most analysts are betting that the Finance Minister P Chidambaram is going to cut the central sales tax (CST) rate to 2 per cent from the current 3 per cent but the government officials feel this could cause a sharp drop in their revenues and the centre must compensate for their losses. Last year state finance ministers had agreed for a cut in the central sales tax from 4 per cent to 3 per cent and from April 1 this rate is supposed to be cut further to 2 per cent. But states have raised disagreements on the terms and conditions of the compensation formula asking the finance minister to revise the whole package.

Not just this, as part of the compensation formula from April 1 states are supposed to raise the basic VAT rate from 4 per cent to 5 per cent and bring textiles under VAT. The states are now backtracking on all these counts. The government might be forced to double compensation paid to states to Rs 13,000 crore if it cuts the CST. Probably for this budget the finance minister might be able to pull off an announcement on reducing central sales tax. However, the government sources say it could be difficult for the finance minister to abolish the CST altogether unless it offers states a very substantial compensation package and that could be a hurdle on the road to a uniform goods and services tax.