Tax panel wants more services in states' kitty

The commissioners of commercial taxes (CCTs) under the Empowered Committee on VAT have favoured that all services barring those having inter-state coverage be brought under states' jurisdiction.

At present, around 30 services like banking, insurance, telecom and financial services have inter-state coverage.

The CCTs had been asked to examine which services could be transferred to states to make up for the loss of revenue on account of the proposed reduction in central sales tax by 1 per cent from the present 4 per cent from April 1. A 1 per cent cut in CST would lead to a revenue loss of around Rs 5,000 crore for states.

Officials said the CCTs had recommended that the Centre could continue to levy service tax, but states should be allowed to collect and appropriate the proceeds from all services barring the ones which have inter-state coverage.

The recommendations of the commissioners, who met here yesterday, will now be examined by the state finance ministers when they meet on Wednesday.

The meeting is expected to take a final view on the mechanism for compensation on account of the proposed cut in central sales tax.

Officials said most states were still in favour of a cash compensation for the revenue loss of around Rs 5,000 crore on account of the cut in CST from 4 per cent to 3 per cent. All the same, states are looking at other alternatives to finance the revenue loss, such as transfer of some services to states. Another alternative being considered is a hike in revenue share from service tax from 30.5 per cent to 50 per cent.

"Since the move to increase the share of revenue from service tax or transfer of some services to states would take time because of legislative changes required, most states want cash compensation as the revenue would begin to accrue from day one," an official added.

Meanwhile, the compensation paid by the Centre to states for revenue loss under VAT is likely to touch Rs 4,500 crore at the end of the current fiscal, with additional claims of around Rs 2,131 crore being made by states. The Centre has so far paid Rs 1,512.36 crore as compensation. Officials had earlier projected the total compensation claims to be around Rs 3,500 crore against a Budget provision of Rs 5,000 crore.

"Some states like Maharashtra have made a claim of Rs 1,146 crore for the July-January period, while Karnataka has sought Rs 787 crore for the September-February period. These claims have pushed up the earlier compensation estimate," an official said.