The Hindu Business Line : CST phase-out: States seek full Central compensation

THE States have now made it known to the Union Finance Minister, Mr P. Chidambaram, that full Central compensation of central sales tax (CST) losses was an essential pre-condition for phasing-out this tax from April 1 next year.

Apart from focusing on the criticality of compensation, the Value-Added Tax (VAT) panel today suggested to the Centre that States be allowed to collect service tax on most of the services except those of "nationally required areas."

Finance Minister `open' to idea: "The Union Finance Minister said that he was `open' to the idea of Central compensation for losses from CST phase-out. He has agreed to have a positive attitude towards budgetary support, but also felt that simultaneously other avenues would have to be explored like VAT on items such as sugar, tobacco and textiles and VAT on imports," Dr Asim Dasgupta, Chairman of VAT panel, told newspersons after meeting Mr Chidambaram here today.

Besides Dr Dasgupta, who is also the Finance Minister of West Bengal, the Finance Ministers of Gujarat, Bihar, Jharkhand, Chhattisgarh and Madhya Pradesh were also present at today's meeting.

Reservations: Dr Dasgupta said the Centre has to factor in not only the current collection levels of CST but also its possible growth before deciding on the compensation. He admitted that States have certain reservations on the issue of VAT on sugar, tobacco and textiles which attract additional excise duty (AED).

He also pointed out that States want budgetary support because the losses from CST cut would start taking place from the first month itself.

Dr Dasgupta made it clear that States do not want their suggestion on service tax to be counted towards CST loss compensation.

CST mop-up: In the estimate of the VAT panel, the CST collections this year would be about Rs 18,000 crore and any reduction in CST ceiling rate by 2 per cent from April 1, 2006 would imply that the Central compensation next year would have to be at least Rs 9,000 crore.

Terming the suggestion to confer States with the powers to collect service tax on most of the services as an "innovative suggestion," Dr Dasgupta said the States would be ready to share 50 per cent of such collection or an agreed ratio with the Central Government.

"We have adequate network. Collections require intimate knowledge. If we collect service tax, the total size of the cake would be bigger out of which both the Centre and the States can gain and out of which development expenses can also be incurred," he said.

The Centre, however, is of the view that there are certain services (like financial services) that would have to be reserved within its domain and not passed on to the States for collection.