Resolve CST compensation issue by Aug. 7, States urge PM

If not, States will be forced to adopt tax measures which may not be in the interest of the reforms intended: Modi

The Empowered Committee (EC) of State Finance Ministers on Friday urged Prime Minister Manmohan Singh to resolve the CST (Central sales tax) imbroglio by August 7 so as to remove the element of mistrust between the Centre and the States and enable further progress towards smooth implementation of the Goods and Services Tax (GST) regime.

With the CST compensation issue turning out to be a matter of “trust deficit” between the Centre and the States, the committee, which met here, has also sought a meeting with Dr. Singh to clear the hurdle that has been standing in the way of a big-ticket indirect tax reform.

Speaking to journalists after the meeting, EC chairman Sushil Kumar Modi said: “States are angry, they are agitated. We have urged the Prime Minister to resolve the issue by August 7. There are about 20 days and we hope he [Dr. Singh] will resolve the issue.” If the issue was not settled by that date, the committee’s executive council “will meet and decide” the next course of action, he said.

In a veiled threat to the Centre earlier, Mr. Modi also wrote to the Prime Minister – who is now looking after the Finance portfolio – stating that if the CST compensation issue was not resolved, the State governments would be forced to adopt certain tax measures which might not be in the interest of the tax reforms intended. In his letter, Mr. Modi pointed out that originally when it was decided to phase out the CST, it was presumed that the GST would be implemented from April 2010.

According to Mr. Modi, following a cut in the CST rate from 4 to 2 per cent, States have been incurring revenue losses which, as promised by the Centre, are to be made good through compensation. However, against a total demand of about Rs. 19,000 crore as compensation for the CST reduction in 2010-11, the States received about a third at Rs. 6,393 crore from the Centre and were told by the Union Finance Ministry that there would be no further compensation.

“If there is trust deficit at the beginning of the GST, then how will the States rely on the Central government for compensation when the GST is implemented,” Mr. Modi asked and pointed out that if the CST compensation issue was not resolved “there would be difficulties in implementation of GST.”

Voicing the unity of all States in this matter, West Bengal Finance Minister Amit Mitra stressed that it was time for the Centre to keep its commitment on compensation for revenue loss on the CST reduction till GST was implemented. “All the States are on the same page. The CST issue must be settled… the matter is setting a wrong precedence and wrong vibrations... how can we go to the GST when there is no trust on an issue like CST.”

Asked if the much-delayed GST regime would now be finally rolled out in April 2013, Mr. Modi said both the Centre and the States were for the new taxation regime but no timeline could be fixed for its implementation. However, neither the States nor the Centre should be blamed for the delay.