Lok Sabha - 07.09.2007

A consensus had been arrived at between he Centre and the States that the CST should be phased out in 4 steps, i.e., reducing the CST rate from 4% to 3% w.e.f. 01.04.2007, from 3% to 2% w.e.f. 01.04.2008, from 2% to 1% w.e.f. 01.04.2009 and eventually abolishing the tax on 31.03.2010. A package of compensation to the States for revenue loss on account of phasing out of the CST has also been agreed upon between the States and the Central Government.

As per the agreed package, the states shall be compensated through a combination of non-monetary and monetary measures. During 2007-08, such measures to be taken to compensate the states for CST reduction from 4% to 3% include abolition of Form-D, levy of VAT on Tobacco @12.5% by States and transfer of total proceeds of tax on identified services to the States. In case these measures prove inadequate to fully cover the loss, budgetary support shall be given. In order to give effect to the above decisions the Taxation Laws (Amendment) Act, 2007 has been enacted, whereby the CST Act, 1956 and the Additional Duties of Excise (Goods of Special Importance) Act, 1957 have been amended, inter alia, resulting in the reduction of rate of CST on inter-State sale to registered dealers (against Form-C) from 4% to 3% w.e.f. 01.04.2007, the withdrawal of the facility of inter-State purchases by Government Departments at concessional CST rate against Form-D and the enabling of the states to levy VAT on Tobacco. Further, a provision of Rs.2,500 crores has been made in the Department of Revenue Budget for 2007-08 for releasing CST Compensation to the States.

This information was given by Minister of State for Finance, Shri S.S. Palanimanickam in reply to a question raised by Shri Hansraj G. Ahir in Lok Sabha today.

Phasing out central sales tax prompts a compensation package enabling state VAT on tobacco and transfer of service tax proceeds. Phasing out of the Central Sales Tax is effected through scheduled rate reductions and an intergovernmental compensation package combining abolition of Form D concessional purchases, enabling States to levy VAT on tobacco, and transfer of proceeds of tax on identified services to States; where these measures fall short, central budgetary support will be provided. The Taxation Laws (Amendment) Act, 2007 amends the CST Act and related law to implement the rate reduction, remove concessional inter State purchases by government departments, and enable State VAT on tobacco, with a dedicated budget provision for compensation in 2007 08.