Losses covered, states okay CST phase-out

The central government and the states have decided to cut the Central Sales Tax (CST) rate by 1 per cent to 3 per cent from April 1 this year.

A package deal worked out today includes bringing 44 new items under the ambit of service tax from the next financial year.

The CST will be phased out over three years "" from 4 per cent to 3 per cent, to 2 per cent, and to 1 per cent in 2007-08, 2008-09, and 2009-10, respectively. The tax will be completely phased out in 2010-11.

State governments will be fully compensated for any revenue loss that may occur due to the phase-out.

This will be done through a package of measures, which includes transfer of 77 services to states, on which they will be able to levy and collect taxes. If required, the Centre will also provide budgetary support to state governments.

"We have reached a broad consensus on phasing out CST on the basis of a full compensation package for loss of revenue suffered by states, which includes transfer of certain services to them (for taxation)," said Asim Dasgupta, chairman of the Empowered Committee of State Finance Ministers on VAT.

The committee met here today. This was followed by a meeting with Union Finance Minister P Chidambaram. "I am happy to report that a broad consensus has been reached on phasing out CST," Chidambaram told reporters after the meeting.

Dasgupta said the decision arrived at would require legislative action on the part of the Centre. This implies that the forthcoming Union Budget will take necessary steps in this regard.

CST collections of Rs 25,300 crore are expected in 2007-08, with the states suffering a loss of Rs 6,325 crore due to the cut in the rate.