In a letter to Prime Minister Manmohan Singh, States have said the Centre's refusal to compensate them for revenue losses due to reduction in CST rate could derail introduction of Goods and Service Tax (GST), dubbed as a big-ticket tax reform.
"In case States are not given CST compensation by the Government of India till GST is introduced, States will have to suffer substantial revenue losses and may be forced to adopt certain tax measures which may not be in the interest of tax reforms," Chairman of Empowered Committee of State Finance Ministers Sushil Kumar Modi said in letter to Singh.
Seeking a meeting with the Prime Minister, who now also holds the finance portfolio, Modi said the "unilateral" decision of the Centre not to compensate states on reduction in CST rate after 2010-11 is likely to "adversely affect the process of tax reforms in the country, including the introduction of GST".
"I humbly and sincerely request you to kindly reconsider the decision regarding CST compensation," Modi said.
The Central Sales Tax (CST) is collected by the Centre and distributed among states. As a pre-cursor to GST, Centre and States in April, 2007 had agreed to phase out CST over a period of three years and in line CST rate was reduced to three per cent and then to two per cent. The Centre had already compensated states' for losses for up to 2010-11.
Modi, however, said originally when it was decided to phase out CST, it was presumed GST would be implemented from April, 2010.
A Parliamentary panel is scrutinising the Constitution Amendment Bill on GST which will usher in a new indirect tax regime. The panel is likely to submit its report in the monsoon session of Parliament.