The Finance Minister P Chidambaram is likely to drive a hard bargain while deciding on the Central Sales Tax (CST) compensation for states. After the Empowered Committee of State Finance Ministers comes back from its study tour of Canada and Japan this week, the finance minister is likely to seek states’ support for the Goods & Services Tax (GST) in return for a CST compensation package from the Centre.
Finance ministry officials told Business Standard the Centre would give further compensation to states only after getting assurance of their cooperation in rolling out GST. They said the Union government does not have the fiscal space to give thousands of crores of rupees as CST compensation, but still if it is willing to accommodate the demands of the states, they should also reciprocate.
“A meeting of the Empowered Committee may be convened shortly. The finance minister will meet the state finance ministers to iron out issues related to GST and CST compensation. He is yet to take a final view on CST compensation,” said a finance ministry official who did not wish to be identified.
CST is a tax on inter-state movement of goods imposed by the Centre but collected by states. The states were asked to gradually phase out CST to enable GST introduction in 2010-11. The Cabinet had approved a formula for compensation till 2009-10 for losses accruing to the states due to reduction in CST rate. As the GST roll-out got delayed, states asked the Centre for compensation beyond 2009-10.
The problem now is that the Centre budgeted for only Rs 300 crore as CST compensation this year, while the states had pegged their losses at Rs 19,000 crore for 2010-11. President Pranab Mukherjee, before quitting as finance minister, had cleared a compensation package after the states threatened that holding back the money could jeopardize chances of GST rollout.
The issue was referred to Prime Minister Manmohan Singh who briefly handled the finance portfolio after Mukherjee’s departure from the North block. The Prime Minister’s Office apparently put a query about impact of the move on the fiscal deficit, which is already expected to breach the Budget Estimate. The PMO did not take a call on this issue and the matter came to new finance minister Chidambaram.
Although the finance ministry may agree to CST compensation, it may not come before the next Budget. Likewise, the states’ support for GST may only help the Centre get the Constitutional Amendment Bill cleared by Parliament by the end of this year. It is currently being examined by a Parliamentary panel.
GST implementation may take longer as after the Constitutional Amendment Bill is cleared by a two-third majority in Parliament and vetted by half of the states, GST legislation will have to be cleared by Parliament and the Legislative Assembly of each of the states, officials said.
Chidambaram had recently said he was hopeful that an agreement with the Empowered Committee would be reached soon. “I had one meeting with (Empowered Committee Chairman) Sushil Modi and have sought another meeting with him and the full Committee. If we can complete the exercise by October 15 there is no reason why we should assume that there will not be an agreement,” he said.
