The Lok Sabha, on Monday, passed the Taxation Laws (Amendment) Bill, 2007, paving the way for reduction in the Central Sales Tax (CST) rate from four per cent to three per cent with effect from April 1.

The Bill basically amends the CST Act, 1956 to enable a phased abolition of the levy by April 1, 2010, which will also be the date for introduction of a nationwide Goods and Service Tax.

The CST is an origin-based tax on inter-State sale of goods. Since the tax levied by the State from where the goods originate is not provided refund credit by the consuming State, it militates against the principle of value added tax (VAT), where set-offs are given against taxes paid on inputs and other previous purchases. Once the CST is done away with, it would be possible to usher in a genuine national-level, destination-based VAT covering both goods and services.

The Bill provides for lowering the CST rate to three per cent from April 1, besides conferring the Centre enabling powers to carry out further reductions through notification in the gazette, according to the Finance Minister, Mr P. Chidambaram.

Revenues from CST are budgeted at Rs 19,345.08 crore during the current fiscal, up from Rs 14,284.10 crore during 2004-05. Given the huge financial implications from abolition of this levy, the Bill (which has to now be passed by the Rajya Sabha as well) has also proposed to drop tobacco (including cigarettes) from the list of `declared goods' under Section 14 of the CST Act.

States are currently not allowed to levy VAT at more than four per cent on `declared goods'. Removing tobacco from this list would enable them to tax cigarettes at a higher rate, which will help recoup some of the revenue losses from scrapping CST.