States seek less for CST phase-out

While sticking to the October 1 deadline for reducing Central Sales Tax from 4 per cent to 3 per cent, states have now indicated that they would like to review the situation after the tax is brought down to 2 per cent next fiscal.

A meeting of the Asim Dasgupta Chairman of the Empowered Committee of state finance ministers on Value Added Tax with Finance Minister P Chidambaram today to finalise a compensation package for phasing out the CST proved inconclusive and both agreed to meet again after a week.

Dasgupta told reporters that he remained "incurably confident" that a agreement which would be an appropriate mix of "budgetary and non-budgetary measures would be reached soon".

States informed the Centre that they would be willing to consider 40 per cent share of the overall service tax proceeds as an interim compensation measure. States had until now been demanding 50 per cent share of the service tax proceeds.

They also dropped their demand to include sugar, tobacco and textiles under VAT and have instead suggested continuing with the present norm of the Centre allocating one per cent from its revenue collection to the states towards these three items.

The states have projected an 18 per cent CST growth rate and have accordingly pointed out that the losses on account of reduction in CST from 4 to 3 per cent from October 1 would be Rs 2,500 crore this fiscal and Rs 12,000 crore next fiscal.

The Centre on its part has offered to allow states to tax 77 intra-state services which include 44 services which are not taxed at present such as legal services, education and health, hotel and restaurants, electricity transmission and distribution and entertainment services and 33 existing services which already attract service tax such as mandap services, commission agents, rent-a-cab services, real estate agents and security services. The legal services however exclude the legal services availed by corporates.

While the loss of revenue to the Centre on account of the transfer of the 33 existing services to the states would be Rs 3,700 crore this fiscal, the states could gain as much as Rs 5,000 crore even if they managed to tax 10 per cent of the new services suggested by the Finance Ministry.

States have, however, agreed to the Centre's offer to phase out Form C and Form D and remove iron and steel from the declared goods list.

Withdrawl of Form D would remove four per cent concessional rate allowed on all inter-state government purchases. Officials said that the railways was expected to be the most adversely affected as it could lose Rs 1,000 crore in a year.

Similarly, withdrawl of Form C would mean that the 4 per cent concessional rate on inter-state purchases would no longer be enjoyed by mining, telecom and power sectors.

Government officials said that the October 1 deadline may not be met since the Centre would have to pass an Ordinance to amend the CST Act 1961 to reduce the CST from 4 per cent to 3 per cent.