Centre allocates over Rs 15,000 crore to states as CST compensation

New Delhi: The centre has allocated more than Rs.15,000 crore as compensation to states for central sales tax (CST) in the next fiscal year, as it tries to build a consensus over the design of the goods and services tax (GST).

The government is aiming to get the constitutional amendment bill necessary for the rollout of indirect tax regime approved in the current session of Parliament and implement it from April 2016.

It would need the support of opposition parties and state governments to do so.

Looking to address the lack of trust among states, finance minister Arun Jaitley has allocated Rs.15,028 crore as compensation in 2015-16, compared with Rs.11,000 crore in 2014-15.

CST compensation is due to states for the loss of revenue on account of its gradual phasing out. This levy has been brought down to 2% from 4% as part of the movement towards GST, which will turn India into a common market.

Once the payment is made, the government would have cleared around two-thirds of the total CST compensation due to the states.

Bowing to their demands for a clear compensatory framework in the GST regime, the government has made a provision in the constitutional amendment bill for compensation to states for revenue losses for five years.

Elaborating the way forward for GST in a media brief on Saturday after presenting the budget, Jaitley had said that the centre will discuss the key features of the amendment bill that was tabled in the Lok Sabha in December with the empowered committee of state finance ministers.

But the committee will have to look for a new head as Abdul Rahim Rather, the outgoing chairman, and his party, the National Conference, lost the state assembly elections and he had to resign as finance minister of Jammu and Kashmir.

The centre will need to get the bill passed in both Houses of Parliament with a two-thirds majority. The bill then needs to be ratified by at least 50% of the state assemblies.

The government is also parallely working on the fine print of the GST law, which will be required for implementation of this indirect tax reform following the passage of the constitutional amendment bill.

GST is a far-reaching tax reform that will subsume all indirect taxes and help the creation of a common market across India by removing all barriers across states.

Despite the Union government claiming that it has reached a broad consensus across states, many of them have expressed concerns about the key features of the bill. While states such as Tamil Nadu have expressed concerns over loss of autonomy, Odisha has opposed subsuming of the mining tax, while Gujarat has sought the continuation of the additional 1% tax proposed in the constitutional amendment to be collected by producing states beyond the two-year sunset clause.

Passage of the amendment bill in the current session of Parliament will be crucial for implementation of GST from April 2016, said analysts.

“After the constitituional amendment bill is passed, the government will have to bring in the draft GST law for industry feedback. Ideally, the GST law should be in place at least six months before the date of GST rollout for the industry to be prepared in terms of the Information technology infrastructure,” said Bipin Sapra, a tax partner at EY, a consultancy earlier known as Ernst and Young. “In addition, the goods and services tax network, or GSTN, the IT (information technology) backbone for GST, will also need to be ready.”

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.