The UPA government may have crossed a major hurdle in the way of the proposed Goods and Services Tax (GST), with states agreeing to a compensation formula in lieu of the phased reduction of the Central Sales Tax.
The agreement on the compensation package, reached at a meeting here on Monday, clears the way for the proposed GST, leading to its roll-out possibly by 2014-15.
At the Empowered Group of state finance ministers meeting, besides full compensation for 2010-11, the Centre has also agreed to partly offset states revenue loss for the subsequent two years arising from a reduction a few years ago in central sales tax from 4 per cent to 2 per cent.
Chairman of the Empowered Committee of State Finance Ministers, Sushil Kumar Modi said a sub-committee has given its recommendation for 100 per cent compensation to states for 2010-11, 75 per cent for 2011-12 and 50 per cent for 2012-13 respectively.
The Centre will have to spend Rs 34,000 crore as CST arrears over next few years, said Modi. The payout is likely to be done in a staggered manner.
Though the Centre, in April this year, had decided against giving any compensation citing global macroeconomic uncertainties and also lower growth projections for domestic GDP growth, Modi said a provision for the same would be made in the 2013-14 Union Budget.
The sub-committee on GST design also submitted its report but no conclusion could be reached today. Though GST was originally scheduled for launch on April 1, 2010, it could not be implemented due to differences between the Centre and the states as the latter apprehended loss of revenue.
The Centre has also dropped its earlier stand that it would deduct from the compensation amount any revenue gain states may have made by increasing state-level value-added tax or VAT from 4 per cent to 5 per cent.
The stalemate on GST for two years on account of the disagreement on compensation has now ended, said Modi, adding that the central government and the empowered committee have approved suggestions by a subcommittee chaired by Union revenue secretary Sumit Bose on the issue.
States want to be compensated for reduced revenue due to the lowering of CST levied on inter-state movement of goods from 4 per cent to 3 per cent in 2007-08, and further to 2 per cent in 2008-09. CST is supposed to be brought down to zero once GST is in place.
Finance minister P Chidambaram recently said that he planned to introduce some amendments to the GST constitutional amendment Bill during the winter session of Parliament and was hopeful it would be passed in December. With the vexed issue of CST compensation having been cleared, the structure and powers of the proposed GST council, the rates of GST (which will have Centre and state components) and the threshold where the tax would kick in are to be discussed by the empowered committee on Tuesday.
As a revenue raising measure, some states had increased their VAT rate from 4 per cent to 5 per cent three years ago, which prompted the Centre to deduct any gains from such increase from the compensation due to those states. Thus, states were given only Rs 6,393 crore for 2010-11, about a third of what they had demanded.