New Delhi: Differences between the Union and state governments over central sales tax (CST) compensation have aggravated, with the states claiming the Centre is bringing new issues into the debate.
“The states are very angry because they have not received compensation even for 2010-11 till now,” Sushil Kumar Modi, chairman of an empowered group of state finance ministers, told a media briefing on Monday after a meeting of the group.
The Centre is not releasing a part of the compensation as some states have not raised value-added tax (VAT) on lower-category items from 4% to 5%, he said. Raising VAT should be left to the states and not be included as a part of the compensation formula, he added.
“We are sending a strongly worded letter to the finance minister (Pranab Mukherjee). When we are trying to have a congenial atmosphere for GST (goods and services tax), this should not be a bone of contention between the Centre and states,” Modi said.
The states are reluctant to raise VAT on lower-category items as some of these include politically sensitive food items. “The issue of compensation between the centre and states needs to be resolved at the earliest as it can impact the settlement on GST,” said Bipin Sapra, tax partner at Ernst and Young. CST accrues to the state, where the manufacturing centre is located when goods produced in one state are sold in another.
As a part of India’s indirect tax reform, manufacturing states reduced CST from 4% to 3% in 2007-08 and further to 2% in 2008-09 after the introduction of VAT, as it is considered distortionary. CST will be scrapped in a GST regime. GST is India’s most ambitious indirect tax reform, which seeks to stitch together a common market and reduce costs to replace the current fragmented regime.
The thumb rule is that the larger the number of taxes subsumed in GST, the lower will be the revenue neutral rate. The states are reluctant to subsume all taxes into GST as it would mean a loss of power to unilaterally change some taxes.
Modi said while the Centre has budgeted Rs 12,000 crore as CST compensation for 2010-11, there is a disagreement on the method of calculation. “It was never in the guidelines that an increase in CST will be part of the compensation formula.”
The panel of state finance ministers also discussed a request by the finance ministry to submit their views on a revised draft negative list of services tax by 15 December. “We have circulated the concept paper to all state governments and all of them are yet to apply their minds on it,” he said. “However, states are more concerned of many transactions where both service(s) and goods constitute a part, such as construction, hotel and accommodation. For example, on food items sold in hotels, both value-added tax and services tax are imposed.”
Sapra said it is important that the states’ views are incorporated in the introduction of the negative list of services so that there are minimal changes on transition to GST. The empowered group has decided to form a sub-committee of all state finance secretaries, which will submit its report by the end of this month, he added. “We will discuss the matter in the next GST meet to be held in Madhya Pradesh. We have asked the (Union) finance minister to extend the deadline of 15 December to submit our views on the matter.”
The committee rejected the Union government’s demand to include domestic natural gas and imported re gasified liquefied natural gas in the “declared goods” category as it will have limited the rate of VAT imposed by states. “States are of the opinion that no other item be included in the declared goods list and the matter should be left to the empowered committee to decide the matter,” Modi said.
Any direction on the matter by the Union government, he said, will be an “encroachment on the autonomy of states.”