After much bickering with states, the finance ministry today reduced the central sales tax (CST) rate on inter-state sales from 3 per cent to 2 per cent with effect from June 1.The ministry notified the rate-cut to the states despite differences on compensating them for losses of about Rs 13,000 crore in 2008-09 because of the cut.

CST was cut from 4 per cent to 3 per cent on April 1, 2007. It was to be reduced to 2 per cent on April 1, 2008, and phased out by March 2010.

However, the reduction to 2 per cent got delayed after states refused to increase the value-added tax (VAT) rate from 4 per cent to 5 per cent and bring textiles under VAT, as proposed by the central government.

While states will get some revenue from certain services that they have been allowed to tax, VAT on tobacco and removal of Form D, there are differences over compensating states for the remaining Rs 9,600 crore.

Apparently, states, while agreeing to phase out CST in 2007, had agreed to raise the VAT rate from 4 per cent to 5 per cent and tax textiles.

Sources said states were now refusing to do so citing high inflation and the coming Assembly elections. States are now demanding cash compensation from the central government.

With no immediate solution in sight, the central government decided to reduce the rate. The Empowered Committee, which will meet in the last week of June, may discuss the issue.

“It is unlikely that states will raise the VAT rate in 2008-09 due to elections. However, an increase may be possible in 2009-10,” said a source.

Non-reduction in the CST rate would have embarrassed both the central and state governments, who are working together to introduce a uniform goods and service tax by 2010 by eliminating CST.

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