It's win-win for state kitties

BUDGET & STATES

Chidambaram is pushing through his uniform tax regime by way of incentives across all boards.

Finance minister P Chidambaram today announced a cut in the Central Sales Tax from 4 per cent to 3 per cent, with the idea of finally phasing it out.

CST and VAT are contradictory in nature since the former imposes a tax on the inter-state sale of goods, while the latter creates a uniform tax structure across states.

With the Centre's proposal to move to a Goods and Services Tax (GST) to create a common market from April 1, 2010, Chidambaram said that the Empowered Committee of State Finance Ministers has chalked out a plan to work with the Central government on a roadmap for the proposed national level Goods and Services Tax (GST) that will come into effect from the same day.

Chidambaram has allotted Rs 5,495 crore, a 37.7 per cent hike, for compensation of any losses on account of Value Added Tax and Central excise tax, as against Rs 3,990 crore in 2006-07.

Hailing VAT to be an "unqualified success", Chidambaram informed that revenues to states after implementing VAT increased by 13.8 per cent in 2005-06, and by 24.3 per cent in the first nine months of 2006-07.

The Centre did not specify any budgetary support figure for states to meet their losses due to the cut in CST and clubbed it with the VAT compensation.

According to an earlier agreement with the VAT panel, part of the loss due to the cut in CST, pegged at over Rs 6,000 crore next fiscal, will be met by transferring to states the entire collections from tax on 33 services.

The states currently get 30.5 per cent from these services. The Centre also proposed to provide states the power to levy a tax on 44 local services, but there is no final agreement on this.

A majority of states shifted to VAT from April 1, 2005, but a few of them refrained from introducing the new tax on the ground that CST and VAT could not coexist.

All states except Uttar Pradesh have implemented VAT. Tamil Nadu has implemented VAT from January 1, 2007 while the union territory of Pondicherry has decided to implement VAT from April 1, 2007.

On Tuesday, the Economic Survey said that the Centre had received Rs 514 crore of claims for VAT compensation from five states so far in the current fiscal.

In last year's Budget, the finance minister had said the states will be compensated through monetary and non-monetary means. It had also included LPG for domestic use under the declared goods category.