States seek 50% share in service tax

With the Central Sales Tax (CST) phase-out beginning this fiscal, the state governments are negotiating with the Centre to get a 50 per cent share of the service tax collection pie, instead of the current 30.5 per cent.

"The states are in discussion with the Union Government to secure 50 per cent of service tax collections on items on which they get 30.5 per cent," said an official source.

According to an agreement early this year, the Centre will give the entire proceeds from the 33 services currently under the tax net to states to compensate loss on account of reduction of the CST rate from 4 per cent to 3 per cent this fiscal.

States were also allowed to collect value-added tax on tobacco and inter-state government departmental purchases to compensate for the CST phase-out.

There is also a plan to give 44 new services to states to collect tax and keep the proceeds. Discussions on this are on with the central government. However, some new services like health and sports have not found favour with the states due to a possible backlash of citizens.

The CST will be phased out by March 2010, to give way to an integrated Goods and Services Tax (GST) from April 2010.

At the moment the CST is collected by the central government and distributed among the states. The one percentage point reduction in the CST will result in a loss of over Rs 6,000 crore in revenue to the states this fiscal.

Meanwhile, a delegation of state finance ministers under the leadership of official VAT panel chairman and West Bengal Finance Minister Asim Dasgupta has returned from a 10-day trip to Australia and Singapore after studying their GST system.

"The purpose of the visit was to see what was being done globally in taxation, specially in federal countries," a member of the delegation said.

Australia charges a single tax rate of 10 per cent on all goods and services while Singapore levies 5 per cent cess on all items except education, health and sports. "India has to decide which items need to be taxed and which don't," the official source said.

There are a total of 100 items under the service tax net at the moment in the country. This number will increase to 144 after the proposed 44 services are added. Service tax collections, the fastest growing tax in India, increased to 62 per cent in the last fiscal to touch Rs 37,352 crore.