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    Centre must compensate for CST cut: Sushil Modi


    CST was reduced to 2% over 3-years ago. "Now the Centre has to compensate states for the loss in their revenue because of this reduction," he said.

    NEW DELHI: The grouping of state finance ministers on Goods and Services Tax (GST) will meet in the capital on March 3, to discuss the Centre's refusal to compensate states for the loss of revenue on account of reduced central sales tax (CST).

    The Centre has refused compensation in the current fiscal, even as it agreed to release 6,393.94 crore for 2010-11, following the gradual lowering of CST to 2% from 4%. According to some estimates, the reduction has caused a cumulative revenue loss of 19,000 crore annually to the states.

    "We are trying to talk to the central government and arrive at an amicable solution so that the states get their due,'' Bihar finance minister Sushil Kumar Modi, who heads the Empowered Committee of State Finance Ministers on GST, told ET on Sunday. "We are inching positively towards GST roll-out. Therefore, at this stage, if the government of India takes a unilateral decision, it will hamper the implementation of GST."

    CST, Modi said, was reduced to 2% over three years ago. "Now the Centre has to compensate states for the loss in their revenue because of this reduction," he said. The Centre has asked all states to file their compensation claims for the previous fiscal on account of reduction in CST. It plans to do away with CST in phases to facilitate implementation of GST.

    States have, however, taken objection to Centre's letter addressed to the committee chairman last month which said the compensation for 2010-11 may be considered the "final settlement." It also referred to guidelines worked out by Centre in consultation with states.

    However, an official who did not wish to be named said the committee had never agreed to the payment of CST compensation for 2010-11 after deducting the amount of assumed revenue on account of the increase in the VAT rate from 4% to 5%. There were no guidelines which mentioned that any amount will be deducted after factoring in assumed revenue accruing to the states because of the increase in VAT rates, the official said.

    The revised guidelines on the compensation package were worked out by the Centre and the states on August 22, 2008, the official added. These guidelines had not envisaged any further "non-monetary steps" by the states such as increasing VAT from 4% to 5%, or slapping of a tax on textile and sugar.

    Moreover, several states such as West Bengal, Andhra Pradesh, Tamil Nadu and Orissa did not raise VAT rate from 4% to 5% during 2010-11, and therefore, they were strongly opposed to deducting any amount from the compensation owed to them after assuming the revenue that they would have generated had they increased the VAT rate and deducting that amount from their compensation package.

    States such as Orissa, Jharkhand, West Bengal and Chhattisgarh say they receive a major portion of their revenue from VAT on declared goods. Only the Centre is authorised to raise taxes on items under the category of declared goods. These states are being "unfairly penalised" for the Centre's lapses, the person quoted earlier said.

    The committee maintains that states such as Gujarat, Madhya Pradesh, Nagaland, Maharashtra and Uttar Pradesh had not received any compensation for 2010-11, while Assam, Tamil Nadu and Rajasthan had not even got 25% of the CST compensation claimed. They argue that "adequate budgetary provision was available with the Centre to provide CST compensation to the states for 2010-11 and only a small additional amount was required".

    The states have also sought to put the onus on the Centre for the delay in GST roll-out. They pointed out that a "roadmap for GST'' had been sent to the Centre way back on April 30, 2002, but the latter's comments were received only after a gap of over seven months.

    Again, it was argued by them that while the Centre kicked off the process of preparing the draft amendment bill on GST on September 30, 2009, its final draft was submitted to the Empowered Committee only on July 21, 2010 - after a gap of more than 10 months.

    Similarly, the comments of the states on the third draft were conveyed to the Centre on February 11, 2011, and it has been pending with the central government and Parliament for over a year. The committee, therefore, feels the states do not have any role to play in the implementation of the GST.
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