The Government departments at both the Central and State levels would in the coming days be required to pay more tax on their inter-State purchases of goods.

The Centre and the Empowered Committee of State Finance Ministers on Value Added Tax (VAT) have agreed to do away with the facility of concessional tax rate currently enjoyed by Government departments on such purchases.

As this move would bolster revenues for the States, this measure has been counted towards the compensation package to be offered to the States for the proposed central sales tax (CST) phase-out.

This would also bring Government departments at par with the private sector as they would be required to fork out VAT at normal rates instead of concessional rate of 4 per cent. Official sources said that abolition of Form D, which allows Government departments to make inter-State purchases at 4 per cent, would result in the central ministries and organisations such as the Railways paying up additional taxes of anywhere between Rs 1,500-Rs 3,000 crore annually to the States.

In 2007-08, States may face revenue loss of Rs 6,000-Rs 6,500 crore on account of reduction in CST from 4 to 3 per cent with effect from April 1 this year.

"The main benefit to the States is in terms of additional revenues flowing to them through the higher spending of the Central Government ministries from their budget allocations," sources said.

The proposed abolition of Form D would result in increased revenues to the State exchequer, as sales made to Government departments would attract higher rate of incidence of sales tax/VAT, Mr Aseem Chawla, Director-Taxation, Amarchand & Mangaldas, told Business Line.

He highlighted that the removal of Form D was one process towards the "big ticket" item of CST phase-out. The system of Form D was introduced in September 1958.

The doing away with Form D may also imply higher cost for provision of goods or services, depending on whether the incremental increase in incidence of taxes is passed on to the ultimate consumer or absorbed by the Government.

Meanwhile, official sources said that VAT on imports would not form part of the compensation package for CST phase-out although this issue was very much on the discussion table.

"As an issue, VAT on imports is very much alive," sources said.