The Hindu Business Line : Package to compensate CST loss on the anvil

The Finance Minister, Mr P. Chidambaram, is likely to unveil in his Budget speech on Tuesday a compensation package to the States for the revenue losses that would arise from the proposed Central sales tax (CST) ceiling rate reduction from four per cent to two per cent.

In the run-up to the Union Budget, the Empowered Committee of State Finance Ministers on VAT had made it known to the Finance Minister that full Central compensation of CST losses was a pre-condition for phasing out this tax from April 1 this year.

The panel has in principle agreed to the reduction.

CST collections are expected to touch Rs 18,000 crore in 2005-06. Currently, the entire CST is collected and retained by the States.

As part of the compensation package, the panel is expecting a "combination of steps" from the Finance Minister, including Budgetary support.

Apart from the Budgetary support, there is also a demand to allow States to impose VAT on sugar, tobacco, and textiles (additional excise duty items), to empower States to tax certain services, and devolution of entire revenues arising from VAT on imports.

Moreover, the VAT-implementing States are expecting adequate devolution of financial resources obtained by the Centre through service tax.

However, the VAT panel Chairman, Dr Asim Dasgupta, has been taking a position that States do not want their demands on service tax to be counted towards CST revenue loss compensation.

The States are keen on Budgetary support, as the losses from CST cut would start take place from the first month itself (April 2006).

With the States eyeing the burgeoning service tax kitty of the Centre and the fact that the tax collectors see lot of potential in service tax, the Finance Minister may bring more services under the service tax net, from 81 currently.

In the Budget for 2005-06, Mr Chidambaram had provided Rs 5,000 crore towards compensation for the revenue losses, if any, arising from VAT implementation by States.