FM ready to pay up UPA's CST bill but that will not break the GST jinx

Finance Minister Arun Jaitley yesterday announced the government would pay Rs 11,000 crore towards compensation to states for losses incurred towards rollout of CST.

The FM’s statement comes even as the government is struggling in its fiscal position, with 90 percent of the FY2015 fiscal deficit target having been reached in the first seven months of the year (till October).

The move, Jaitley said, was a step towards “restoring the trust deficit” between states and the Centre on the issue of CST and would help boost the rollout of GST.

“Despite a difficult and challenging (fiscal) situation, I propose to release about Rs 11,000 crore, a third (of the total CST compensation of Rs 34,000 crore sought by states), this year as part-payment of CST compensation to the states,” Jaitley said in Parliament. “This will take care of the amounts from 2010-11 onwards. The balance of the amount, I will start paying from the next financial year onwards.”

As a background, CST, a tax imposed on the inter-state movement of goods, was reduced from 4 percent to 3 percent in 2007-08 and further to 2 percent in 2008-09 after the UPA-led central government introduced the value-added tax (VAT). It had then promised the states that it would bear losses arising out reduction in CST, which were later agreed upon to be Rs 33,000 crore.

However, in Budget 2013-14, then finance minister P Chidambaram had provided for only Rs 9,000 crore towards compensation, out of which only Rs 1,900 crore was eventually released.

It was this trust deficit that had partly become a roadblock in the rollout of the goods and sales tax, the most ambitious tax reform that will subsume most state and federal level taxes and levies (such as excise duty, service tax, VAT, entry tax, etc) into itself.

In theirbid to avoid the repeat of the post-VATexperience, states have been insisting the Centre make a constitutional provision in the GST bill that will make compensatingtheirlosses mandatory.

Both the UPA and NDA governments, not wanting to be squeezed into a corner in a rough fiscal year, have been unwilling to commit as much but in recent developments, Jaitley has reportedly prevailed upon states to agree to create a GST council (comprising of the Union FM and state FMs) that will sort out compensation issues.

However, even with the CST issue hopefully out of the way, it seems unlikely the GST bill will be tabled in Parliament in the Winter session that ends on December 23.

This was indicated by minister of state for finance Jayant Sinha in an interaction with CNBC-TV18. The minister said the “current legislative calendar was packed” and that the next step on GST would be decided at Jaitley’s meeting with state FMs, which takes place today. (The minister did reiterate, however, that the tax’s rollout is on target for April 2016.)

While Jaitley may have likely sorted out the CST compensation issue and got a step closer to its implementation, there still are issues that need to be solved: such as the fate of alcohol, tobacco and petroleum with many states wanting the lucrative items to be kept out of GST’s ambit.