Rs 5,000-6,000 cr to ease states' CST woes

The central government is likely to provide budgetary support of Rs 5,000-6,000 crore (Rs 50-60 billion) and allow states to tax more services to compensate them for the revenue loss due to a reduction in the central sales tax rate to 2 per cent from 3 per cent from April 1.

The empowered committee of state fnance ministers had recommended to the finance ministry that the Centre should provide direct budgetary support and transfer more services to states on account of the rate cut, sources said.

States have refused to hike the value-added tax rate on more than 250 items like drugs, agricultural and industrial inputs from 4 per cent to 5 per cent to make up for revenue loss.

They have also declined to impose VAT on textiles and sugar as suggested by the finance ministry.

It is estimated that a reduction in the CST rate from 3 per cent to 2 per cent is likely to cost the states Rs 12,000-13,000 crore (Rs 120 billion to Rs 130 billion) in 2008-09.

States are expected to get part of the compensation from services transferred to them, VAT on tobacco and inter-state purchases by government departments.

They are likely to receive Rs 3,000 crore (Rs 30 billion) from 33 services. Another Rs 1,500 crore (Rs 15 billion) is likely to come from VAT on government department purchases. A significant amount of revenue will also accrue from VAT on tobacco.

When the CST rate was cut from 4 per cent to 3 per cent in 2007-08, the central government had mandated budgetary support of Rs 2,500 crore (Rs 25 billion). The central government levies CST on inter-state transactions and distributes revenue among states.

A finance ministry official said states had assured an increase in the VAT rate and imposition of VAT on textiles in 2008, but later changed their stance.

States are bargaining hard as they are comfortable in terms of revenues collections which have witnessed 15-20 per cent growth in 2007-08. Hence, they are not interested in raising the tax rates as elections are round the corner in many states.

With Goods and Service Tax set to be implemented from April 2010, states have also requested the central government to keep collecting tax on the services transferred to them in 2008-09 also and transfer the proceeds to them.