Introduction
Before the implementation of the Goods and Services Tax (GST), Value Added Tax (VAT) governed the taxation of goods within individual states in India. However, cross-border trade—the sale of goods from one state to another—was primarily governed by the Central Sales Tax (CST), creating a distinct framework from intra-state VAT. Understanding the effect of VAT on cross-border trade requires exploring how VAT and CST operated together and the challenges faced in the pre-GST indirect tax regime.

VAT and Its Territorial Scope
VAT was a state-level tax levied only on intra-state sales, meaning transactions where the sale and delivery of goods occurred within the same state. Each state had its own VAT laws, rates, and compliance requirements.

Cross-Border Trade and CST
Cross-border sales, where goods were sold by a dealer in one state and transported to a buyer in another, were subject to Central Sales Tax (CST), governed by the Central Sales Tax Act, 1956. CST was levied and collected by the originating state on such inter-state sales.

Interaction Between VAT and CST

• The originating state collected CST on interstate sales.
  
• The destination state’s VAT did not apply on these sales.
  
• Dealers had to comply with both VAT (on intra-state purchases) and CST (on interstate sales).
  

Impact on Business Operations
Businesses involved in cross-border trade had to:

• Register under VAT in the state of purchase.
  
• Comply with CST provisions for interstate sales.
  
• Manage complex documentation, including Form C, to avail concessional CST rates.
  

Input Tax Credit (ITC) Limitations
One major limitation was that CST did not allow input tax credit, unlike VAT. This created a tax cascading effect in cross-border transactions, as dealers could not claim credit for CST paid on interstate purchases.

Documentation and Compliance

• Proper issuance and collection of Form C from buyers were essential to benefit from concessional CST rates.
  
• Failure to obtain Form C led to payment of CST at the full rate.
  
• Documentation burdens increased compliance costs and risks of penalty.
  

Tax Rate Variations
CST was generally levied at a fixed rate of 2% (concessional) if Form C was furnished; otherwise, the full state VAT rate applied as CST. This created uncertainty and planning challenges for traders.

Economic and Trade Effects

• The differential treatment of VAT and CST created inefficiencies in supply chains.
  
• Dealers sometimes preferred intra-state sourcing to avoid CST complexities.
  
• The system encouraged tax planning that was not always aligned with economic activity.
  

Transition to GST
The introduction of GST subsumed both VAT and CST into a single national tax, eliminating the distinction between intra-state and inter-state sales, and allowing seamless input tax credit across states.

Conclusion
VAT applied strictly to intra-state trade, while cross-border trade within India was taxed under CST, leading to a fragmented tax structure with limitations on input tax credit and higher compliance burdens. This dual system impacted pricing, cash flow, and efficiency for businesses engaged in interstate commerce until the unified GST regime streamlined indirect taxation across the country.

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