States offer Centre a choice on CST compensation

‘Either provide adequate compensation or revert to four per cent levy'

Piqued at the Centre's intransigence over the issue of Central Sales Tax (CST) compensation to States, the Empowered Committee of State Finance Ministers on Saturday sought either an adequate cash relief to States for the revenue loss incurred on account of the reduction in levy from four per cent to two per cent or else a rollback to the earlier rate.

Offering a choice to the Centre on the CST issue, the empowered panel, at its meeting here, also finalised a negative list of 35 services which should be kept out of the purview of the proposed Goods and Services Tax (GST).

Briefing the media after the meeting, Empowered Committee Chairman and Bihar's Deputy Chief Minister and Finance Minister Sushil Kumar Modi said: “If the government does not release compensation, then [the] Centre should revert to the CST levy of four per cent from the present two per cent level…99 per cent of the States were of the opinion that either they should be compensated or the Centre should revert to [the] four per cent rate.”

As a precursor to roll-out of the GST — a unified indirect tax regime in lieu of excise, service tax, sales tax and octroi — the CST payable on inter-State sales of goods was brought down to two per cent from four per cent. Although a Central levy, the revenue mopped up through the CST is passed on to the State from where the goods originate. The ultimate objective is to phase out the CST completely when the new tax regime is introduced.

The controversy over the CST compensation has now surfaced owing to the delay in roll-out of the GST regime. Originally, the new tax dispensation was to be launched with effect from April 1, 2010. However, owing to various reasons, the major one being a lack of consensus between the Centre and the States on various ticklish issues, implementation of the GST stands postponed to April 1, 2013, for all practical purposes.

However, the Finance Ministry is said to have refused to compensate State governments for the loss of revenue owing to the CST reduction from 2010-11 onwards. Even as States have sought a total compensation of Rs. 19,060 crore for 2010-11, the Finance Ministry released Rs. 6,393 crore, while noting that no more funds would be provided on this account.

Resenting the Centre's stand, Mr. Modi said: “On January 27, 2012, Finance Secretary R.S. Gujral wrote a letter saying that the Centre has released a CST compensation of Rs. 6,393 crore for the fiscal 2010-11 and 2010-11 is the last year for CST compensation...and no further CST compensation would be released.”

Pointing to the fallacy in the Finance Ministry's stance on the issue, Mr. Modi said: “The GST implementation will take another one year. The delay in implementation of the GST is natural and neither the States nor the Centre is responsible for it.” Stoppage of CST compensation, he said, was a unilateral decision taken by the Centre without consulting the States.

Direct import of ATF

The panel also discussed the issue of revenue loss owing to the direct import of ATF (aviation turbine fuel) by air carriers. “The direct import of ATF by aviation companies will cause a revenue loss of Rs. 2,500 crore to the States. Although the Centre has protected their [airlines] revenues, the move will impact revenues of the States,” Mr. Modi said.