VAT and Inter-State Trade

• VAT (Value Added Tax) was a state-level tax applicable only on intra-state sales
  
• For inter-state trade, VAT was not directly applicable as each state had its own tax laws
  
• The tax on inter-state movement of goods was governed by the Central Sales Tax (CST) Act, 1956
  
• VAT applied when the sale and delivery of goods occurred within the same state
  
• Inter-state sales were those where the movement of goods crossed state borders pursuant to a contract

Application of Central Sales Tax (CST)

• CST was levied by the originating state (from where goods were dispatched) on inter-state sales
  
• The standard rate of CST was 2% against submission of Form C by the purchaser
  
• If Form C was not provided, higher local VAT rates were applied (up to 12.5% or more)
  
• CST was collected by the selling dealer and deposited with their state government
  
• CST did not allow input tax credit, resulting in tax cascading on inter-state transactions

Documentation Required for Inter-State Transactions

• Form C was used by the purchasing dealer to avail CST at concessional rate
  
• Form F was used for stock transfers or branch transfers across states (not treated as sales)
  
• Form E1 and E2 were used in chain transactions involving multiple states and buyers
  
• A valid invoice and goods transport document (like road permit or waybill) were mandatory
  
• Dealers had to maintain proper records of dispatch, delivery, and tax paid to justify inter-state classification

Challenges in Inter-State Taxation under VAT and CST

• Lack of uniformity in VAT rates across states led to complex compliance
  
• CST was not creditable, increasing the cost of goods for inter-state buyers
  
• Multiple forms and permits created administrative hurdles and chances of delay
  
• Risk of disputes over classification of inter-state vs intra-state transactions
  
• Increased documentation burden for businesses with operations in multiple states

Transition to GST and End of CST System

• The Goods and Services Tax (GST) implemented in July 2017 replaced both VAT and CST
  
• Under GST, inter-state trade is now taxed under Integrated GST (IGST)
  
• IGST is creditable across state borders, eliminating the cascading effect of CST
  
• Interstate documentation was simplified under e-way bill system
  
• The new system created a common national market, addressing major flaws of VAT and CST