The empowered committee of state finance ministers on value-added tax is considering a four-year phase out of the central sales tax.
Beginning April 1, 2006, the CST could be reduced to 3 per cent from the current 4 per cent. Every April thereafter for three years, this tax will be reduced by 1 percentage point culminating in it being abolished by 2009.
The 1 per cent cut will cost an estimated revenue loss of Rs 5,000 crore (Rs 50 billion) for the states. This four-year phaseout is intended to precede the introduction of the goods and service tax (GST) from 2010, as announced by Finance Minister P Chidambaram in the Budget for 2006-07.
Officials told Business Standard that there was unanimity among states, which met here on Saturday, to reduce the CST from the coming fiscal year. The proposal, however, is contingent on the states agreeing to a compensation formula for loss of revenue.
The issue is expected to be finalised at a meeting of the commissioners of commercial taxes next week. The states will then discuss the proposal with Chidambaram.
Regarding compensation, officials said the states were deliberating on enhancing their share from service tax to 50 per cent from 30.5 per cent as laid out by the Twelfth Finance Commission. Alternatively, states are also discussing transferring some services from the Centre to the state.
"Some states want that if the loss cannot be fully compensated from the higher service tax revenue share, the gap should be made up by the Centre through direct cash payments," an official said. States have also agreed to retain the present the VAT rates of 4 per cent and 12.5 per cent. The empowered committee has decided that rates will be reviewed after six months.
Officials said the states have also agreed to bring textiles, tobacco and sugar under the VAT from 2007-08.
These three items were outside the VAT because they attracted an additional excise duty. Officials said the states had decided to delay this decision by a year on account of the forthcoming state elections.
States have also agreed to introduce the VAT on imports. "There is no opposition to the move but this could take a while as it would require a constitutional amendment," an official said.
States have also decided to seek full cash compensation for the revenue loss (estimated at Rs 2,000 crore or 20 billion) arising out of the Centre's decision to make LPG a declared good.
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