Mumbai: The phase-out of central sales tax, which will smoothen the functioning of the new Value-added tax (VAT) system, will begin from April 1, although in a diluted form and a year after it was envisaged originally.

CST will henceforth be charged on inter-state sales at 3 per cent or the rate of VAT/sales tax of the states concerned. CST will be phased out paving way for introduction of Goods and Services Tax (GST) by 2010-11.

The government has already issued a notification to cut CST to three per cent, following passage of the bill in this respect by the Parliament early this month.
"The new rate of CST will pave way for cut in taxes on various commodities bought through inter-state trade, apart from crossing another milestone toward national tax system," said a senior official of the finance ministry.

The notification to amend the CST Act has also empowered states to levy VAT at the rate of 12.5 per cent on tobacco products such as cigarettes, bidis and pan masala with tobacco.

As part of the agreement between the centre and states, the latter would also get 100 per cent share of taxes on 33 services from the centre.

The centre has made budgetary provision of Rs2,500 crore for support to states if they do not meet the over Rs6,000 crore annual loss due to one per cent cut in CST.

This support could be enlarged or reduced, depending upon the realisation of tax on tobacco products and their increased share in services tax, said the official.