Phasing Out Central Sales Tax - Withdrawing Trade Boundaries


Prof. Pradipta Kumar Sanyal
Asst. Professor-Finance Area
Alliance Business Academy

We, Indians are many in one. We do not require any permission for moving from one state to another. We can freely move within India anywhere we like to. But what about "Goods"?

Are they freely movable from state to another state like human being? The answer to the question is of course a big "NO". Goods means all movable property, cannot be transacted from one state to another state freely without the permission of Government authorities. There are certain rules and regulations which have to be followed for moving the goods from one state to another. These rules and regulations as imposed by the central government and are governed by one particular act, which is popularly known as Central Sales Act (CST), 1956. Total tax structure of our country is divided into two- i.e., -Direct Tax and Indirect Tax. Central Sales Tax is a part of Indirect Tax. Central sales tax act provides for levy on Inter-State Sales and according to entry 92A of list I (union list) empowers central government to impose tax on inter-state sales.

Article 269(3) and article 286(2) of constitution authorizes Parliament to formulate principles for determining when the sale or purchase takes place outside a state or in the course of imports and exports. Central Sales tax is imposed on movement of goods (except electrical energy) from one state to another. In the last two budgets it has been highlighted to phase out CST Act in two to three stages. With the introduction of Value Added Tax (VAT) from 1st April 2005 in several states and subsequently in almost all states of our country, the phasing out of CST has become obvious since with the introduction of VAT, CST is like a boundary as per as trading is concerned. Introduction of VAT and its 100% implementation is possible if we don't have trade boundaries. The process of phasing out CST has already begun from the last financial year i.e., 2007-08. In the last financial year CST had been reduced to 3% and subsequently from 1 st June 2008 it has been reduced to 2% on the basis of discussion between the Empowered Committee of state finance ministers and the Union Finance Minister regarding the compensation package, the government of India, Ministry of Finance, department of Revenue has issued a notification on the same and CST will be reduced to nil in 2010. Priority of the Government in this regard is to 

* reduce the CST to Nil, and
* give full advantage of VAT to the dealers' community.

Prior to the discussion of the effect of CST phase out, a brief historical background of CST Act will add to more clarification in this regard.

Historical background of CST

Introduction of Central Sales Tax was felt because of the following reasons:-

i) Territorial nexus with sale transaction.
ii) Provision of Article 286 of the Constitution.

There may be more than one state having "territorial nexus" with the sale transaction and in such case more than one state may try to tax the transaction on the "Nexus" theory. This ultimately led to double levy of tax on the same transaction.

Another factor was the provision of article 286 of the constitution making state not eligible for collection of Central Sales Tax.

Government of India formed a "Taxation Enquiry Commission" in April 1953, which had submitted its report in December 1954 and recommendations were made to amend article 269 and 286, thereby adding entry 92A in union list and amending entry 54 of state list. The amendments were effective from 11th September 1956 and subsequently Central Sales Tax Act was passed and brought into force on 5th January 1957.

How CST works

As per section 6(1) of CST Act 1956, provides that subject to other provisions of the CST Act, every dealer shall be liable to pay tax under this act on all sale of goods(except electrical energy) effected by him in the course of inter state trade or commerce.

As per section 3 of CST Act defines inter state sale as follows:-

- A sale or purchase of goods shall be deemed to take place in the course of inter-state trade or commerce if the sale or purchase

a) occasions the movement of goods from one sate to another, or
b) is effected by a transfer of documents of title to the goods during their course of movement from one sate to another.

In the present context of taxation of CST if any dealer, as has been defined under CST Act, fulfilling any of the above two conditions under section 3 of the CST Act has to pay central sales tax at the prevailing rate.

The phasing out of CST completely will give the dealers community, particularly who deals in inter-state transactions, an advantage towards payment of tax. The same can be illustrated by the help of example.


Let suppose Mr. A is a dealer in state X (where VAT as well as CST Act is applicable).Mr. A is a registered dealer under the VAT and CST Acts in the state X. He purchased goods worth Rupees 1, 00,000/- during the financial year 2008-09 from another registered dealer in state Y. what would be the tax implications of this transaction.

The answer to the question can be presented in following steps:-

Step - 1

Purchase price of goods                                       1, 00, 000
Add Central Sales Tax
Imposed by state Y @2%                                           2,000/-
(Goods purchased with                                       ___________
Form C)

Cost of the goods to                                          1, 02,000/-
Mr. A including CST                                 --------------------

Rate of tax is 2% if it is purchased with declaration form (form 'C') in the inter state trade or commerce. After paying Rs 1, 02,000/-(one lakh two thousand) including CST of Rs 2,000/-, Mr. A brought the goods to state X and suppose the value addition of Rs 10,000/- is made to the cost of the goods.


Cost of the goods to Mr. A                                    1, 02,000/-

Add Value addition
Made by Mr. A (profit element)                                  10,000/-

Sale price of the goods in state X                         1, 12,000/-

Now we will analyze the problem from VAT point of view.


Let suppose rate of VAT in state X = 12.5%

                           Value of the goods          VAT   Amount             @12.5% (Value+VAT)
Goods                        1, 12,000                      14,000                            1, 26,000

According to VAT Act, the value and VAT will be shown separately.

So the aggregate sale price of the goods is Rs 1, 26,000/-(including VAT i.e., 14000 @12.5%).


Payment of tax by Mr. A under VAT, in state X, to the government exchequers is as follows:-

VAT collected by Mr. A                                       Rs. 14,000
On the goods sold.
(To be treated as output
Tax under VAT)

Less Input tax credit                                                     Nil
(Registered dealers
Under Vat get a credit for tax
Paid at the time of purchase
Of goods)

Tax payable by Mr. A to Government                     Rs 14,000

Here the dealer has been deprived off of input tax credit available under VAT act, because the dealer (Mr. A) made an inter-state purchase (i.e., purchasing from another state) and not intra state (within the same state). As per VAT act, no input tax credit is allowable if the goods have been purchased from outside the state. So 2% CST (i.e., Rs. 2000/-) paid by Mr. A has not been accounted for as input tax credit. This is the case, if CST is applicable and if we assume that CST has been totally phased out, and then what will be the tax payable for Mr. A to the government ex-chequers.

If there will be no CST, then the rate of 4% taxation no longer be applicable and the transactions between two states would be considered intra- state rather than inter-state. In the example, if we add that, the rate of VAT on the same goods is also 12.5% in state Y (from the state Mr. A has purchased the goods) then what will be the tax implication? It is further important to note here that, if CST is imposed on particular goods than VAT will not be imposed and if Vat is imposed than there is no question of imposing CST on the same goods. So taking the line into the example, as now, Mr. A's transaction with state Y is considered intra-state and he has to pay VAT in state Y @ 12.5% and instead of CST @2%. For Mr. A, when he is purchasing the goods from state Y by paying VAT  @12.5% on the purchase value of the goods, his tax amount would be Rs, 12,500/- (i.e., 12.5% on Rs, 1,00,000/-, the purchase value of the goods).


VAT collected by Mr. A by
Selling the goods in state X                                       14,000/-

Less Input Tax Credit 
(VAT paid to state Y
At the time of purchasing
The same goods                                                     12,500/-
Tax payable by Mr. A                                                1,500/-
To Government Exchequers.                     --------------------

So in this case Mr. A is getting input tax credit of Rs 12,500/- which he had already paid at the time of purchasing the goods thereby paying a tax of only Rs, 1500/- instead of Rs 14000 as calculated above in the example.

The above examples are taken on a hypothetical basis to make readers understand about implication of CST and VAT; the actual calculations may vary from the above.


From the example, it is seen that in case of total phasing out of CST, the inter-state transaction become intra-state and the trade boundary between the two states will be withdrawn. Total phasing out of CST will further make the dealers eligible for input tax credit, so he can take the set off against the purchase tax paid at the time of purchase. By withdrawing trade boundaries a free trade is possible among all states of our country. A uniform tax structure can be made possible in all states and all the legal formalities relating to transactions of goods can be reduced to a great extent, thereby abolishing the requirements/ formalities for the sales tax check gates, way bills, octroi, and entry tax. Goods can be moved from one state to another or one corner to another corner of India without much legal hassles, just like us - the human being, who can travel freely from one state to another. By withdrawing CST, we can rightly say that we, Indians, are many in one and justify the statement fully.


1. Singhania VK " Student Guide to Income Tax"
2. Datey VS " Indirect Taxes  Law & Practice"
3. Datey VS " Central Sales Tax Law and Practice"

Prof. Pradipta Kumar Sanyal
Asst. Professor-Finance Area
Alliance Business Academy

Source: E-mail November 27, 2008


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