Nod to CST phase-out

CABINET DECIDES

The Union Cabinet today gave approval for making necessary changes in the law in the coming Budget session to phase out the central sales tax (CST). The CST rate will be cut from 4 per cent to 3 per cent from April 1. The phase-out is expected to be completed by 2010-11.

The Centre will introduce a legislation to allow states to tax certain identified services and impose additional duties on excise goods like tobacco to compensate states for the loss of revenue due to the phase-out.

Besides, the Union government is understood to have assured states of budgetary support to cover any shortfalls.

The government will amend the Central Sales Tax Act, 1956 and the Additional Duties of Excise Act, 1957. "This will mark the beginning of a very significant tax reform measure, which is critical for success of value-added tax and introduction of goods and service tax in future," an official statement said.

The Taxation Laws (Amendment) Bill, 2007, will be introduced in the coming Budget session of Parliament.

The CST is collected by the central government and distributed between states. A 1 per cent reduction in the CST is likely to result in a loss of Rs 6,250 crore to states' exchequer in 2007-08.

Earlier in the day, Chairman of the Empowered Committee of State Finance Ministers Asim Dasgupta met Finance Minister P Chidambaram to finalise the compensation package for states.

Earlier this year, the centre had agreed to states' proposal for allowing them to tax 77 services and keep the entire proceeds. Of the 77 services, 33 are currently taxed by the Centre, while another 44 are new items to be brought under the service tax net.

For the first year, the Centre will collect the tax and pass on the entire proceeds to states.

The 44 new services to be brought under the service tax net include barbers, legal, education, health, sports and performances of Bollywood actors.