The Centre has partly agreed to states’ demand for continuing Central Sales Tax (CST) under the new Goods and Services Tax (GST). The states can continue to levy CST on goods that will be kept outside GST, such as petroleum, motor spirit, aviation turbine fuel, natural gas and alcohol.
Though it is called Central Sales Tax, the tax collected under the CST Act is kept by the state from which the movement of goods commences.
The Centre, however, is not willing to accept the demand of states to levy CST on inter-state movement of all goods in the new regime. A finance ministry official said this would not be possible because CST is an origin-based tax, whereas GST would be a destination-based tax. Moreover, the Centre will levy IGST on inter-state movement of goods and is constitutionally-barred from taxing the same activity twice.
“Some exporting states like Madhya Pradesh and Gujarat want CST on inter-state movement of all goods, but that will lead to distortions. Goods outside the GST chain can attract CST or any other tax levied at present. The CST rate on these goods can be decided later. It can be kept at the existing level of two per cent or even more or less,” said the official.
States had suggested to the Centre that CST be allowed in the form of a transaction fee levied at one to two per cent. The states had argued that it would provide them some comfort in the new regime and require less compensation from the Centre on loss of any revenue in GST.
CST was cut from four to three per cent from April 1, 2007 and then to two per cent in 2008. As part of the implementation of value added tax (VAT), it was to be reduced by one per cent every year and made nil by April 2011, but it has not been cut further.
Finance Minister Pranab Mukherjee has said the Centre would fully compensate states for any revenue loss on account of CST reduction in 2009-10 and release the balance outstanding amount without delay. While the total compensation package for states worked out to Rs 14,000 crore for 2009-10, an amount of Rs 5,000 crore will be paid out of the total transfer of proceeds from tax on 33 services to the states. This left Rs 9,000 crore to be paid in compensation to the states.