Before leaving North Block, Pranab clears CST compensation

Pranab Mukherjee failed to roll out the Goods and Services Tax (GST) in the last three years, but before stepping down as finance minister yesterday, he cleared a proposal to provide compensation to states for losses on account of reduction in central sales tax (CST). The ministry might soon seek Cabinet approval for offering the package to states.

The issue of CST compensation, which had turned into an impediment for GST negotiations, would now be discussed in the next meeting of the empowered committee of state finance ministers, on July 13. States would also discuss progress of the Constitution Amendment Bill for GST, the IT platform for GST (GSTN), and the Negative List for taxation of services. The Centre feels a breakthrough on CST compensation may help it record some progress on GST negotiations with states.

The CST compensation would be provided for 2010-11. States had sought compensation for losses of about Rs 19,000 crore during the year, for which the Centre had already given them about Rs 6,000 crore. It may now provide about 50 per cent of the remaining amount, subject to the nod of the Cabinet. “The Cabinet had approved CST compensation only till 2009-10. For compensation for 2010-11, we will have to seek fresh Cabinet approval,” said a ministry official.

The CST compensation was approved by Mukherjee after Sushil Modi, chairman of the empowered committee, had written to him on June 22, urging him to resolve the matter before demitting office. In his letter, Modi, also the deputy chief minister of Bihar, had cautioned if the issue remained unresolved for long, it could affect the implementation of GST.

In January, Finance Secretary R S Gujral had told states the Centre could not pay CST compensation to them endlessly, and the compensation already paid by the Centre should be considered full and final. This had enraged states, which demanded either the full compensation be provided, or the CST rate be increased from two per cent to four per cent.

CST, a tax on inter-state movement of goods imposed by the Centre and collected by states, was reduced from four per cent to three per cent in 2007-08 and to two per cent in 2008-09, after the introduction of the value-added tax. CST compensation was initially envisaged for only three years, as GST was scheduled to be introduced from April 2010. However, owing to delay in rolling out GST, states have asked for compensation for 2011-12 as well. In Budget 2012-13, the government had made a provision of Rs 300 crore for CST compensation. In the previous Budget, a provision of Rs 12,000 crore was made, but since only Rs 6,000 crore was given, the remaining amount was returned.

Rupesh Yatesh Dalal
Head Research Department

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