Mumbai: The Lok Sabha has passed a bill to phase out the central sales tax (CST) in four stages and eventually abolish it in three years.

The abolition of CST will eventually pave the way for an integrated goods and services tax (GST), to be introduced on April 1, 2010, finance minister P Chidambaram said.

The Taxation Laws (Amendment) Bill, which seeks to amend the CST Act of 1956, proposes to reduce CST from the current four per cent to three per cent beginning April 1, 2007, he said.
CST will go down from three to two per cent from April 1, 2008, from two to one per cent from April one, 2009 and eventually abolished from March 31, 2010.

The minister said the center has worked out a compensation package for states for revenue loss on this account, consisting of non-monetary as well as monetary components.

CST, being an origin-based tax, was inconsistent with VAT which was a destination-based tax, Chidamaran said, adding that CST has a cascading effect (tax on tax) since it was not rebateable against VAT.

The CST is levied by the central government, but the collections are passed on to states. State governments have been demanding the abolition of the CST, as it has led to a distortion in tax administration after the value-added tax (VAT) was introduced two years ago.

The Bill, however, proposes to drop tobacco from the list of declared goods to enable the states to levy VAT on tobacco at a rate higher than four per cent rate applicable to declared goods, he said.