VAT Committee Meeting Likely To Discuss Sales Tax Compensation Issues - June 9, 2008

Compensation for revenue loss to the States on account of central sales tax (CST) decrease continues to be a thorny issue even as the Centre recently cut the ceiling rate from 3 to 2 per cent with effect from June 1. The CST compensation issue will come up for discussion at the forthcoming VAT panel meeting on June 16. They are now getting revenue loss compensation claims for CST reduction in 2007-08. The issue is whether the upper limit accorded recently will apply for 2007-08 related claims or not.

Prior to notification of the CST rate of 2 per cent in the last week of May, the Centre and the empowered committee had accorded that the compensation for revenue loss will be limited to the proportionate loss based on the actual collection of CST in the relevant year. The idea of increasing the general VAT rate from 4 to 5 per cent within financial year 2008-09 may also not be pursued. The Centre was keen that States increase the general VAT rate from 4 to 5 per cent and count additional revenues as part of the CST compensation.

CST Rate Slashed

The Centre on May 30 declared that Central sales tax (CST), a tax on inter-state sale of goods, would stand reduced to 2 per cent with effect from June 1 this year. A notification to this effect was issued on May 30 by the Union Finance Ministry. The notification of new CST rate of 2 per cent in place of the earlier 3 per cent is in accordance with the declaration made by the Union Finance Minister, Mr P. Chidambaram, in his budget speech in February this year. The rate of CST on interstate sale of goods to registered dealers (against Form-C) will now be the lower of 2 per cent and the rate of VAT or State Sales Tax applicable. This decrease forms a part of the roadmap for phasing out CST, to be completed by March 31, 2010. The Central Government and the Empowered Committee of State Finance Ministers have further accorded that the compensation for revenue loss to the States in any year arising from the lowering of CST will be limited to the proportionate loss based on the actual collection of CST in the relevant year.

States Arrive At CST Relief Formula

State Finance Ministers on April 16 has announced the contours of the compensation package that they would demand from the Centre for the decrease in central sales tax (CST) ceiling rate from 3 per cent to 2 per cent. With the Centre and the States yet to accord on the compensation package, there is still uncertainty on the date from which CST rate would be cut to 2 per cent. States are likely to submit their stance on the compensation package in writing to the Union Finance Minister, Mr P. Chidambaram, in the next few days.

Central Sales Tax Ceiling Rate Likely To Be Reduced To 2%

Reduction of Central sales tax (CST) ceiling rate from 3% to 2% may happen soon. The Centre and the State Governments will meet on April 8 to sort out the difficult issues on compensation for the revenue losses that may arise to the States from such a move.

According to the source, the Finance Minister, Mr P. Chidambaram, and the Chairman of the Empowered Committee of State Finance Ministers on Value Added Tax (VAT), Dr Asim Dasgupta, are to discuss on the compensation issue here on April 8. Prior to this, the State Finance Ministers are to meet under the aegis of the Empowered Committee. Indications are that the VAT panel would internally discuss this matter before meeting the Finance Minister.

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.