With revenue collections slowing because of the sudden economic downturn, the states have asked the Centre not to reduce the central sales tax rate by one percentage point from April this year.

Though CST is a central tax, the entire collection, estimated at Rs 25,000 crore (Rs 250 billion) per year, goes to the states. CST was to be cut to 1 per cent from April this year before its phase-out from April 2010, according to an understanding reached between the Centre and the states. From April 1, 2010, the country will transit to a uniform goods and services tax regime.

"It was recommended by the empowered committee of state finance ministers that the CST rate of 2 per cent should continue until GST is implemented," said a source familiar with the development.

The empowered committee met in New Delhi on Wednesday to discuss issues related to GST and CST. It plans to meet Prime Minister Manmohan Singh soon.

The states' move comes after their tax collections grew 12 per cent in the first nine months of the current financial year against the growth of 24 per cent registered in the same period of 2007-08.

CST, which is levied on inter-state sales, is considered distortionary as it has no input tax credit mechanism. The Centre is compensating the states for phasing out CST. "As a consequence of the global economic meltdown and its impact on the Indian economy, there has been a negative impact on the value-added tax revenue of the states," said Asim Dasgupta, West Bengal finance minister and the chairman of the empowered committee.

To fund this deficit, the states have demanded that the Centre immediately provide a Plan grant of Rs 20,000 crore (Rs 200 billion) for development works.