New Delhi, May 6:Resolving the impasse on the phase out of the central sales tax, state governments on Tuesday agreed to reduce the tax rate from 3% to 2%. The matter was resolved following a meeting of the empowered committee of state finance ministers in Thiruvanthapuram.

In return, the Centre will provide a mixture of monetary compensation and revenue from the 33 services transferred to states. State governments will also levy value added tax (Vat) on tobacco.

According to the compensation formula for monetary support, the Centre would provide such funds to states on the basis on the growth of trade and actual losses and not trends in tax collections. States expect to lose about Rs 6,000 crore in 2008-09 from the 1% reduction in the tax.

They had earlier demanded monetary support of about Rs 13,000 crore based on the trends in CST collection.

States have however decided not to increase the Vat rate on intermediate goods from 4% to 5%, as was initially proposed by the Union finance ministry, on account of high inflation and approaching elections. Sources said the states were expected to send in the revised compensation formula to the Union finance ministry soon after which it would notify the 1% reduction in the CST rate. The reduction however may be done retrospectively from April 1, 2008, said one of the ministers present at the Thiruvananthapuram meeting.

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