The Centre and the states today crossed one major hurdle in the way of Goods & Servies Tax (GST) by agreeing to a compensation formula for the Central Sales Tax (CST), but even then the new indirect tax regime might not be introduced in 2013-14.
At the Empowered Group of state finance ministers meeting here, the states' approval though came with some riders. Moreover, they could not come to a consensus on the design and structure of GST.
A sub-committee of the Centre and state government officials recommended 100 per cent compensation to states for a cut in CST from four per cent to two per cent for 2010-11, 75 per cent for 2011-12 and 50 per cent for 2012-13, respectively. The Centre will now have to fork out Rs 34,000 as CST arrears.
"The Empowered Committee of State Finance Ministers has given its approval to the report," said its Chairman and Bihar finance minister Sushil Modi after the meeting.
He said initially some states were agitated that the government was not giving full compensation for losses they made on account of reduction in the CST rate. However, the Centre expressed its inability to provide full compensation due to fiscal constraints and the states finally agreed subject to some conditions.
The states demanded that the compensation should be paid immediately and the Centre should give a timeframe for it. They also threatened to go back to 4 per cent CST rate if 100 per cent compensation was not given for 2013-14.
By its very nature, CST is in contrast with GST since the former is imposed on inter-state movement of goods while the latter creates the common Indian market. So, CST is expected to be out of the system, once GST comes.
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"Unless the compensation is 100 per cent, it will be difficult for us to support GST. Its implementation next year is difficult," said one state finance minister.
Modi said the Centre has said it would be willing to compensate for next year as well if the GST is not introduced.
States like Andhra Pradesh, Gujarat, Tamil Nadu, Odisha, West Bengal and Haryana would benefit most from CST compensation.
A provision for the compensation is likely to be made in the upcoming Budget. It will be paid as per the old formula of August 2008.
The sub-committee on GST design also submitted its report but no conclusion could be reached today and the recommendations will be discussed further tomorrow.
Recently Finance Minister P Chidambaram said if states could arrive at a consensus he would give an outline for the GST in the Budget.
States also demanded that whenever GST is implemented compensation should be provided for five years.
"States fear in the first few years they will make heavy losses. Though the Centre has assured compensation, states want a mechanism so that they don't have to go to the Union government with a begging bowl," Modi said.
GST was originally scheduled to come from April one, 2010, but has been missing the deadlines due to differences between the Centre and the states.