States have cautioned the Centre to resolve the issue of Central Sales Tax (CST) compensation at the earliest to prevent them from taking some anti-reform tax measures. The Empowered Committee of State Finance Ministers has written to Prime Minister Manmohan Singh to intervene in the matter.
In a letter to Singh on July 4, Empowered Committee Chairman Sushil Modi said a unilateral decision by the Centre on CST compensation without consulting the state governments could adversely affect the process of tax reforms in the country, including introduction of the Goods & Services Tax (GST).
CST is a tax on inter-state movement of goods imposed by the Centre but collected by states. The EC, scheduled to meet on July 13 to discuss CST compensation and other issues related to GST and has also requested the Prime Minister to meet the states to sort out the issue.
Earlier, the government had decided that CST would be phased-out beginning April 2007 over a period of three years to pave the way for introduction of GST. As GST was not introduced from April 2010, the Centre had agreed to compensate the states for 2010-11 as well.
States asked for CST compensation of about Rs 19,000 crore for the year. However, in January 2012 Finance Secretary RS Gujral wrote a letter to the states saying the payment of Rs 6,393 crore released for 2010-11 should be considered final and settled by the states. The states strongly objected to this and threatened to restore the CST rate to its original level of 4 per cent against 2 per cent currently.
The states will also discuss the progress of Constitution Amendment Bill for GST, framework of IT platform for GST called GSTN and Negative List for taxation of services in their next meeting.
Due to delay in the rollout of GST, states have asked for compensation 2011-12 also. The government made provision of only Rs 300 crore for CST compensation in this year’s Budget. It will have to seek fresh Cabinet approval for giving more compensation to the states.
