Cabinet approves compensation to states for CST reduction

The union cabinet on Tuesday gave its approval to payment of compensation to states for the loss incurred on account of reduction in central sales tax (CST) from four percent to two percent for three years from fiscal 2010-11.

Sources said the amount of compensation for 2010-11, 2011-12 and 2012-13 will be released in phases in 2014-15, 2015-16 and 2016-17.

The sources said that based on preliminary estimates, Rs.33,0000 crore appears to be payable to states and union territories for the entire period and settling these claims will help create an enabling environment for roll out of goods and services tax (GST).

Rs.10,800 crore was payable for 2010-11 as balance CST compensation.

The sources said that there is a provision in the budget for payment of CST compensation in revised estimates for 2014-15 and it will be used to release payment to states.

CST is levied by the union government and assigned to states within which the tax is applicable, they said, noting it is an "origin-based tax" and is inconsistent with destination based regime proposed under GST.

The cabinet in February 2007 decided to phase out CST and to compensate states for the revenue loss.

The sources said that as per the strategy, the CST was to be abolished on March 31, 2010 and a unified GST was proposed to be introduced from April 1, 2010.

Subsequently, a comprehensive package was worked out which included certain non-monetary measures for augmenting the revenue of states.

The CST rate was reduced from four percent to three percent from April 1, 2007 and to two percent from June 1, 2008. Compensation was paid to states in 2007-08, 2008-09 and 2009-10 - the last with some delay but not since then.

The sources said states have been demanding that CST compensation should be paid without considering increasing in their revenues due to increase in value added tax, and the central government assured them that this will be paid in a phased manner.