States want Centre to resolve their CST compensation demand

With the States firm on seeking a settlement on the Central Sales Tax (CST) compensation issue before moving ahead with rollout of the Goods and Service Tax (GST), Finance Minister P. Chidambaram on Thursday announced that two committees would be constituted to address the contentious issues and move ahead on implementation of the indirect tax regime.

Briefing journalists after his meeting with the Empowered Group of State Finance Ministers here, Mr. Chidambaram said that while one committee would deal with the CST compensation issue, the other would deliberate on the design of the GST framework. “The committees will submit their reports by December 31,” he said while stressing that these two issues would have to be addressed to ensure implementation of the GST.

“The [CST compensation] issue has to be addressed. Compensation is being paid for about two years and then partially for third year but then compensation has not been paid subsequently. That issue has to be addressed. We can't duck that issue…The other issue is the design of the GST. All States support the GST without exception. All of them said we support the GST but we would like to discuss the design of the GST,” Mr. Chidambaram said.

As per the plan worked out, the two sub-committees are to be constituted by Empowered Committee Chairman Sushil Modi, the Centre will nominate its members to both the committees to be headed by the Revenue Secretary. On finalisation of their reports by the two sub-committees, the Finance Minister would then take them up for consideration and approval.

“States want Centre to resolve their CST compensation demand. If the demand is not met, they will not go ahead with the GST rollout. They also have an issue with the design of GST,” Madhya Pradesh Finance Minister Raghavji said after the empowered panel had a meeting earlier during the day. He noted that State governments were against setting up a dispute settlement authority as it would curtail their autonomy to levy taxes.

According to Mr. Modi, States were for roll-out of the GST regime but its implementation should be only after certain thorny issues are resolved. Accordingly, “the two committees would streamline the CST compensation issues for 2011-12 and also give suggestions on the design framework, including exemption and threshold limit,” he said.

The GST regime, which has missed a number of deadlines since the initial proposal for rollout in April 2010, is designed to simultaneously empower both the Centre and the States to levy unified taxes on goods and services. However, prior to its implementation, a way had to be found to phase out the CST which is collected by the Centre and then distributed among the states.

Accordingly in April 2007, it was mutually decided to phase out CST over a three-year period by reducing the levy from four per cent to three per cent and further to two per cent. However, having compensated States for the revenue losses up to 2010-11 owing to the tax cut, the Centre refused to go on compensating them for the delay in implementation of GST. States argued that when it was decided to phase out CST, it was presumed that GST would be implemented from April 2010.

What worsened the issue further was a letter to the Empowered Committee by Finance Secretary R.S. Gujral, stating that States would not be paid any CST compensation from 2011-12 onwards. Also, the compensation for 2010-11 would be restricted to the total of Rs 6,394 crore that had already been paid. The States demanded a total compensation of Rs. 19,000 crore for the fiscal year.