Certain amendments were made in the Constitution through the Constitution (Sixth Amendment) Act, 1956 whereby-
a) Taxes on sales or purchases of goods in the course of inter-State trade or commerce were brought expressly within the purview of the legislative jurisdiction of Parliament;
b) Restrictions could be imposed on the powers of State legislatures with respect to the levy of taxes on the sale or purchase of goods within the State where the goods are of special importance in inter-State trade or commerce.
This amendment also authorized Parliament to formulate principles for determining when a sale or purchase takes place in the course of inter-State trade or commerce or in the course of export or import or outside a State.
Accordingly the Central Sales Tax (CST) Act, 1956 was enacted which came into force on 05.01.1957. Originally, the rate of CST was 1%, which was increased first to 2%, then to 3% and w.e.f. 1st July, 1975 to 4%. The CST Act, 1956 Act provides for declaration of certain goods to be of special importance in inter-State trade or commerce and lay down restrictions on the taxation of such items. The entire revenue accruing under levy of CST is collected and kept by the State in which the sale originates. The Act excludes taxation of imports and exports.
CST being an origin based tax, is inconsistent with Value Added Tax which is a destination based tax with inherent input tax credit refund. An amendment to the Central Sales Tax Act to provide for reduction of the rate of Central Sales Tax for inter-State sales between registered dealers from 4% to 3% w.e.f. 1st April, 2007 was effected in. Through this amendment, facility of inter-State purchases by Government Departments at concessional CST rate, against Form-D has been withdrawn. After this amendment, the rate of CST on inter-State sales to Government will be same as VAT/ State sales tax rate.
Central Sales Tax rate has been further reduced from 3% to 2% with effect from 1st June, 2008. Reduction of CST rate first from 4% to 3% & then from 3% to 2% has been done as a precursor to the introduction of Goods & Services Tax (GST), as CST would be inconsistent with the concept & design of GST.