NEW DELHI: The Union Finance Ministry and the finance ministers of the VAT (value-added tax) regime States have worked out a "broad consensus'' on a package of compensation for States to offset the revenue loss incurred by them on account of a cut in the Central Sales Tax (CST). To start with, the CST ceiling is likely to be reduced to three per cent from the new fiscal year. "I am happy to report a broad consensus has been reached on the issue of phasing out the CST,'' Finance Minister P. Chidambaram told newspersons after a meeting with the Empowered Committee of State Finance Ministers on VAT.

Pegged at a maximum of four per cent now, the CST is levied on the inter-State sale of goods even as the objective of VAT is to have a common market in place.

According to the Empowered Committee Chairman and the West Bengal Finance Minister, Asim Dasgupta, the CST phase-out is likely to start from April 1, 2007, on the basis of the full compensation package to the States. The phase-out, however, would be reviewed periodically to ensure full compensation for the revenue loss at all times, he said.

The revenue collections by way of CST are estimated to be over Rs. 25,000 crore next fiscal. In effect, if the levy is cut by one percentage point from April 2007, the States would stand to lose about Rs. 6,250 crore which will have to be compensated by the Centre.

Mr Chidambaram said out that the package agreed upon would include transfer of the entire tax revenue from certain services along with budgetary support from the Centre to the States, if necessary. Legislative changes, if required, would also be carried out to start the CST phase-out as also compensate the States, he said.

The Delhi Finance Minister, A. K. Walia, said the agreement to cut the CST by one percentage point each year beginning next fiscal would eliminate the entire levy by 2010-11. The Union Finance Ministry, he said, had also agreed to transfer the entire revenue from 77 services to the States. Of these, 44 were to be new services which were of intra-State nature, while the 33 others were already under the tax net.

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