States have agreed to the compensation formula suggested by the Centre for their CST (Central Sales Tax) revenue loss for implementing the Goods and Services Tax (GST), said Sushil Kumar Modi, Chairman of the Empowered Committee of State Finance Ministers, and Deputy Chief Minister of Bihar, here on Monday.

“States will be given 100 per cent compensation of their claims for 2010-11, 75 per cent for 2011-12 and 50 per cent for 2012-13. The compensation formula has been prepared on the basis of the August 22, 2008, guideline,” Mr. Modi said.

He said, “States are not responsible for the delay in introduction of GST. They have lost heavily on account of gradual cut in the Central Sales Tax (CST). GST was scheduled to be launched on April 1, 2010. The Parliamentary Standing Committee has not given its views on the 115th Constitutional Amendment Bill, 2011.”

Payment schedule

“According to initial estimates, the total compensation which the States will receive, comes to around Rs.34,000 crore. The provision for CST compensation could be reflected in the forthcoming budget,” Mr. Modi said.

The Empowered Committee has asked the Centre to prepare a payment schedule. Some States are of the view that they should revert to the earlier 4 per cent CST to make up for the huge losses in case there is a delay in introduction of GST beyond April 1, 2014.

States having manufacturing base and mineral export are the worst sufferers. States that have lost more than Rs.1000 crore due to gradual cut in CST include Gujarat, Andhra Pradesh, West Bengal, Tamil Nadu, Odisha and Haryana.

Critical finances

For the year 2010, States had demanded a compensation of Rs.19,000 crore-, but the Centre could pay only Rs.6,000 crore owing to the critical financial position.

Mr. Modi said States would continue to lose even after rolling out of GST. “States are afraid of incurring heavy losses in the initial years of the GST regime. We have asked the Centre to evolve a mechanism to compensate States for subsequent five years as was done in the case of value added tax.”

Mr. Modi said all the States were in favour of introducing GST. The Empowered Committee would discuss the GST design on Tuesday.

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