Govt proposes to compensate 50% of CST losses to states

With the economic slowdown hitting the exchequer hard, the Centre today proposed that the states accept half of the compensation on account of their losses due to cut in the Central Sales Tax (CST) for the current fiscal.

The states are compensated for the cut in the CST, a tax on inter-state movement of goods, from 4 per cent to 2 per cent in phases as they suffer losses on this count.

While the total compensation package for the states works out to be Rs 14,000 crore for the current fiscal, Rs 5,000 crore will be paid out of the total transfer of proceeds from tax on 33 services to the states.

This would leave Rs 9,000 crore to be paid in compensation to the states, on which the Finance Ministry has asked states to take Rs 4,500 and rest will be paid as arrears.

"The CST compensation package for this current year requires around Rs 14,000 crore, of which about Rs 5,000 crore should be taken care of by 33 services sector items. For the remaining about Rs 9,000 crore, his (Pranab Mukherjee's) suggestion is, if keeping in view the recession, states can accept 50 per cent of it," the Empowered Committee of State Finance Ministers Asim Dasgupta told reporters here today.

The CST was cut from 4 per cent to 3 per cent from April 1, 2007 and then to 2 per cent a year later. It is expected to be removed, once the Goods and Service Tax comes into effect, as it does not conform to the common market concept of either VAT or GST.