The Hindu Business Line : `Broad consensus' on phasing out of CST

Phase out course
Compensation package to include service tax proceeds transfer on certain specified services
Central budgetary support, if required, for compensating States
States to be empowered to levy VAT on tobacco

MR ASIM DASGUPTA

New Delhi , Jan. 3

In a significant step in the VAT implementation process, the Centre and the States on Wednesday reached a "broad consensus" on the phasing out of Central Sales Tax (CST) on the basis of full compensation package for the revenue loss of the States.

Currently, the States collect and retain the entire CST, which is an origin-based tax on inter-State sale of goods. The presence of CST in a destination-based value added tax (VAT) regime creates distortion and therefore the need for doing away with this tax.

Revenue implications

As the removal of CST has revenue implications for the States — estimated to be Rs 25,300 crore in fiscal 2007-08, it has now been decided through a "broad consensus" between the Centre and the States that this tax would be phased out with adequate compensation package for the States.

"I am happy to report that broad consensus has been reached on the phasing out of CST," Mr P. Chidambaram, Union Finance Minister, told reporters after a meeting with the Chairman of the Empowered Committee of State Finance Ministers on VAT, Dr Asim Dasgupta, at North Block here today.

He said that the compensation package would include the transfer to the States of the total service tax revenues on certain identified services. Moreover, Central budgetary support, if required, would also form part of the proposed package. Terming the broad consensus as a "breakthrough", Dr Dasgupta told reporters that States are happy as this "convergence" would bring relief to the common traders, consumers, industrialists and moreover the States' revenues would also be fully protected.

Asked if the phase out would begin from April 1 this year, Dr Dasgupta said that the process might start from this date. He however added that this would be reviewed to ensure that the compensation package remains full.

Indications are that the CST ceiling rate would come down from 4 per cent to 3 per cent from April 1. Sources said that the phase out would be completed before 2010, when the Goods and Services Tax (GST) is likely to be introduced.

Dr Dasgupta, however, declined to go into the specifics of the compensation package, stating that several States and the Central Government were going into the budgetary session and that certain legislative changes are required at both the Central as well as States' level.

Official sources said that the first year may see compensation to the extent of about Rs 6,000 crore-Rs 6,500 crore.

The Centre would, in the first year, collect service tax on 77 identified services and pass on the entire proceeds in the form of cash to the States towards CST compensation. States would also get the power to levy VAT on all tobacco and tobacco items.

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