NEW DELHI: The Central Sales Tax phaseout plan will miss a crucial deadline on Tuesday with both Centre and state governments failing to converge on the compensation package. As per the plan, CST which was reduced from 4% to 3% on April 1, 2007, is to be slashed by 1% further to 2% from Tuesday. State finance ministers are scheduled to hold discussions with Union finance minister P Chidambaram on April 8.

With the reduction in CST rate from 3% to 2%, the states would lose about 12,000-13,000 crore in revenues. The states want the Centre to compensate this loss in full. While the Centre is agreeable in-principle to this, differences have cropped between the two on the mechanism. The differences have also sprung up on account of the state governments demanding some tweaking-in in the already agreed formula at the time of deal on the CST phase out in early 2007.

State finance ministers will now meet Union finance minister P Chidambaram to strike a common ground on the compensation formula. Sources said missing the April 1 date was not of much consequence and the reduction to 2% could be carried out later, with retrospective effect. The levy is to be brought down to 2% from April 2008 and 1% in 2009, before being eventually abolished on March 31, 2010 to pave the way for roll-out of unified goods and service tax from April 1, 2010.

The compensation package for phasing out CST which began from April 1, 2007 includes transfer of power to levy service tax on some services, removal of additional excise duty on tobacco products and textiles, VAT on imports, abolition of Form D, budgetary support and hike in floor rate of VAT. The Centre has removed additional excise duty from tobacco, provided for budgetary support and has already begun transfer of revenues from 33 existing services to states. However, it is yet to bring the 44 new services under tax net.

(Source: Economic Times)

Central Sales Tax phaseout delayed as Centre and states disagree on compensation mechanism, prompting talks on retrospective application. Central Sales Tax phaseout has been delayed because the Centre and state governments have not agreed on the compensation mechanism for revenue losses from the planned rate reduction. Negotiations focus on whether compensation should be full, the technical formula for disbursal, and the possibility of retrospective application. The broader compensation framework includes transfer of service tax revenues, removal of certain excise duties, VAT on imports, abolition of Form D, budgetary support and an increased VAT floor rate, some elements of which the Centre has already implemented while others remain pending.