For introduction of VAT/GST, phasing out of CST is necessary as it is a distortion under the VAT regime. The position regarding phasing out of CST was reviewed by the Empowered Committee in its meeting held in July, 2005 and there was a view that CST should not be phased out in an abrupt manner and all its implications should be studied both by the Government of India and the State Governments. In fact, a number of States expressed their apprehension about loss of their revenue on phasing out of CST and were opposed to the same until their revenue could be protected through service tax and compensation on permanent
basis. This matter was subsequently deliberated upon in several meetings of the Empowered Committee. Crucial meetings were also taken by the then Hon’ble Union Finance Minister on several occasions to discuss this issue. During the meetings, the States were of the view that revenue loss on account of phasing out CST should be fully compensated by the Centre through adequate budgetary support. However, the then Hon’ble Union Finance Minister felt that there was need to explore various non-monetary options also for CST compensation and suggested a combination of ways/multi mechanism for generating the revenue which is likely to be lost due to CST phasing out.
On 22nd March, 2006 a meeting was taken by the then Hon’ble Union Finance Minister and as per decision taken in this meeting, a Technical Committee of Commissioners of VAT/Sales/Trade Taxes was set up to work out various possible options for compensation of revenue loss on account of phasing out of CST and to suggest modalities for such compensation. Subsequently, several rounds of meetings were held with the then Hon’ble Union Finance Minister and a compensation package was finalized to meet the loss on account of phasing out of CST. It was also decided that the CST should be phased out till 31st March, 2010. An announcement to this effect was made by the then Hon’ble Union Finance Minister in his Budget Speech 2007-08 that “VAT has proved to be an unqualified success. VAT revenues of the implementing States increased by 13.8 per cent in 2005-06 and by 24.3 per cent in the first nine months of 2006-07. The next logical step is to phase out Central Sales Tax (CST). The Central Government has reached an agreement with State Governments to phase out CST. Consequently, the CST rate will be reduced from 4 per cent to 3 per cent with effect from April 1, 2007.” Accordingly, as per the consensus arrived between the Centre and the State
Governments, the rate of CST was reduced from 4% to 3% with effect from 1st April, 2007.
Further deliberations were done in the Empowered Committee to discuss about reducing the rate of CST from 3% to 2% with effect from 1st April, 2008 and steps required by the Government of India and the States in this regard. An important meeting was also taken by the then Hon’ble Union Finance Minister on 28th January 2008 to deliberate on various monetary and non monetary measures to be adopted by states and centre so that CST can be reduced to 2%. After due discussions and deliberations, a notification reducing the CST rate from 3% to 2% with effect from 1st June, 2008 was issued by the Government of India. Revised guidelines for the CST compensation were also issued on 22nd August, 2008. The issue regarding the further reduction of CST rate from 2% to 1% w.e.f. April, 1, 2009, was considered by Empowered Committee in its meeting held on 21st January, 2009 and after due consideration it was decided to retain the 2% CST rate till GST is introduced.
After several meetings with the Hon’ble Union Finance Minister and discussions at various levels, the Government of India agreed to provide full CST compensation to the States for the year 2009-10. A meeting was taken by the Hon’ble Union Finance Minister with the Empowered Committee on 18th August, 2010. He assured the States that CST compensation would also be paid for the year 2010-11.