The Hindu Business Line : Finance Ministry panel moots phase-out of CST

Without spelling out the modalities for phasing out the central sales tax (CST), the committee is set to only recommend that CST has no place in a VAT regime and therefore must go.

Annual CST collections are estimated to be between Rs 13,000 crore to Rs 15,000 crore in recent years.

The committee, which is chaired by Dr Govinda Rao, Director, National Institute of Public Finance and Policy (NIPFP), has finalised its report and is likely to submit it to the Union Finance Minister, Mr P. Chidambaram, during this week.

Informed sources said that the committee has decided to refrain from making suggestions on how or when to phase out CST. "It is for the Finance Minister to take a final call on whether the CST should be abolished at one go in the first year of VAT implementation or whether it should be phased out over a certain period. The committee would only say that CST is not compatible with VAT and therefore must go. It would not recommend phase-out schedule," sources said.

This stance of the technical committee comes at a time when Mr Chidambaram had in the recent meeting of the empowered committee of State Finance Ministers, mooted a proposal for continuing with the 4 per cent CST in the first year of implementation of VAT regime from April 1, 2005.

This proposal, which is before the States for their consideration, is in sharp contrast to the earlier thinking in the Finance Ministry that the first year of VAT implementation should see some cut in the CST rate.

At the Empowered Committee meeting held here last month, the Finance Minister had come up with two proposals on CST. One proposal relates to continuation of 4 per cent CST in the first year of VAT implementation, 2 per cent in the second year and complete abolition in the third year. Alternatively, there is also a proposal of 2 per cent in the first year and zero in the second year.

Meanwhile, the Expert Technical committee is also set to recommend a new compensation formula for losses, if any, which may arise in the implementation of VAT. It is likely to recommend that the Centre should compensate only 90 per cent of the losses, if any, of the States in the first year.

In the erstwhile National Democratic Alliance (NDA) regime, the Centre had assured the States that 100 per cent of the losses, if any, would be compensated in the first year.

"There has to be a premium for performance. The Technical committee will recommend that the Centre should compensate only 90 per cent of the losses. If we are going to say that 100 per cent of the losses would be compensated, then States will not make that extra effort in ensuring success of their VAT implementation," sources said.