Come April 1, the ceiling rate on central sales tax (CST), a tax on inter-state sale of goods, would come down from 4 per cent to 3 per cent.

The President, Dr A.P.J. Abdul Kalam, has given his assent to the Taxation Laws (Amendment) Bill 2007, which provides for a four-step phase out of CST.

With the Presidential assent in place, the Finance Ministry has decided to specify April 1 as the date from which the Taxation Laws (Amendment) Act 2007 would come into force.

The notification specifying April 1 as the commencement date would be issued in a day or two, official sources said.

Besides the phase out of CST in four steps (4 to 3 per cent from April 1, 2007, 3 to 2 from April 1, 2008, from 2 to 1 per cent with effect from April 1, 2009 and abolition on March 31, 2010), this law also paves the way for states to levy value added tax (VAT) on tobacco at a rate above 4 per cent.

With the law coming into force from April 1, all Government departments (does not include public sector undertakings) would have to fork out VAT at normal rates on their purchases from this date.

The concessional tax regime hitherto available for government departments has been withdrawn through the Taxation Laws (Amendment) Act 2007. This is likely to result in additional revenues of about Rs 2,000 crore to the States.

The total revenue loss due to the reduction in CST is estimated at Rs 6,350 crore during 2007-08, which will increase with further reduction in CST rate in the following years.

Annual CST collections during 2006-07 are estimated at about Rs 21,000 crore.

VAT on tobacco

Official sources pointed out that all the hurdles in the way of levying VAT on tobacco would stand removed from April 1.

With effect from April 1, tobacco would be dropped from the list of declared goods, thereby, enabling States to levy VAT on tobacco at a rate higher than the 4 per cent applicable to declared goods.

States are looking to levy 12.5 per cent VAT on tobacco.

The Additional Duties of Excise (Goods of Special Importance) Act would also stand amended from April 1 to enable states to levy VAT on tobacco without losing their share of devolution from the divisible pool of central taxes.