New Delhi, March 22 (PTI): A committee on value-added tax today decided to set up a working group on the phasing out of central sales tax and compensation to states for the resultant revenue loss.

The committee, which would comprise officials from state governments and the Union finance ministry, would submit its first draft by the middle of next month.

“We will be on the job by the beginning of the second quarter of 2006-07,” chairman of the empowered committee on VAT, Asim Dasgupta, told reporters after a meeting with finance minister P. Chdiambaram.

“We have asked for higher collection of services tax imposed by the Centre,” he said but refused to quantify the demand as developing a concrete formula of compensation is exactly the terms of reference of the working group.

“Since we would discuss modalities, it would be presumptuous on our part to go into details of what we demanded,” Dasgupta said.

When asked whether CST would be cut by two per cent each in the next two financial years, he said details would be known only after the committee’s report.

Whether BJP-ruled states would switch over to the VAT system if CST was not reduced by April 1, he said representatives of these governments were also part of the empowered committee, which unanimously decided to set up the committee.

It was initially proposed to cut CST by two per cent each during the next two fiscals from the current four per cent.

However, due to resultant loss in revenue to states, a proposal was mooted to go for a one per cent cut in CST for the next four fiscals each.

States get Rs 1,800 crore from CST, which is imposed by the Centre and distributed among the states. A one per cent cut in the tax would make states poorer by Rs 4,500 crore.

Chidambaram had said in his budget speech that the Centre had proposed that the loss of revenue to states because of the CST cut may be compensated through monetary and non-monetary measures which, taken together, will ensure that the states’ revenues remain buoyant.