States reiterate demand for higher compensation on account of reduction in CST

Even as Finance Minister P. Chidambaram sought to induce consensus among States on issues that still stand in the way of progress towards implementation of the much delayed Goods and Services Tax (GST), they reiterated their demand for a higher compensation on account of reduction in the Central Sales Tax (CST) from four to two per cent.

At his pre-budget consultations with State Finance Ministers here on Wednesday, Mr. Chidambaram said it was time to tie up the loose ends. He is stated to have expressed his readiness to outline necessary amendments to the Constitution in his 2013-14 budget speech, provided the State governments arrive at consensus on issues that are thwarting rollout of the new indirect taxes regime.

While the budget is to be presented on February 28, the relevant Constitution (Amendment) Bill, 2011, as introduced in Parliament, is still under scrutiny by the Standing Committee on Finance headed by the former Finance Minister and BJP leader, Yashwant Sinha.

Alongside, the two committees which were set up — one to sort out the CST compensation issue and the other to look into the GST design network — are expected to submit their reports to the Centre on January 21.

During the discussions at Wednesday’s meeting, according to informed sources, on the specific demand for increased compensation owing to the cut in CST, the States were told that though the Centre was open to the idea — a position the Union Finance Minister voiced even earlier — much would depend on the overall fiscal situation.

Explaining the current economic environment and the tight fiscal situation, Mr. Chidambaram reminded the State Ministers that the Centre was committed to drawing up a fiscal road map and it aimed to contain the deficit to three per cent of the GDP (gross domestic product) by 2016-17. In this regard, he asked the States to provide speedy clearance for projects so as to expedite investments and kick-start the growth process.

Interacting with reporters later, Bihar Finance Minister and Chairman of the Empowered Committee of State Finance Ministers Sushil Kumar Modi said all States were together in demanding a higher compensation for the cut in CST. The other common issue they raised was implementation of the B.K. Chaturvedi Committee recommendations on Centrally-sponsored schemes.

Mr. Modi said the States, while seeking a reduction in the total number of such programmes, demanded a cap on their contribution to these schemes at 15 per cent. Many States also favoured direct cash transfer of benefits and expansion of the banking network for this purpose, especially in rural areas.

Moreover, the States enjoying a good debt to GDP ratio sought permission to borrow up to four per cent of their GSDP (gross state domestic product). For, such borrowings are capped at three per cent under the FRBM Act.

According to Madhya Pradesh Finance Minister Raghavji, the States demanded inclusion of 33 services in the ‘negative list’ of Service Tax so that they do not come under the levy. During the consultations, Tamil Nadu’s O. Panneerselvam said the States should be permitted to ‘dovetail’ the funding of the Rashtriya Swasthya Bima Yojana with the State public health insurance scheme, and the Centre’s share in the old-age pension scheme should be raised to Rs. 750 at the least.

Mr. Modi said that at the next meeting of the empowered panel, to be held in Bhubaneswar on January 28 and 29, the recommendations of the two committees on GST-related issues would also be discussed.

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