The phase out of Central Sales Tax, which is a major distortion in the way of smooth functioning of VAT system, will begin from Sunday, albeit a year after and in diluted form than envisaged originally.

CST, which is imposed on inter-state trade of goods, would be cut from 4 per cent to 3 per cent as part of its eventual elimination by 2010-11.

The government has already issued a notification to cut CST to three per cent, following passage of the bill in this respect by the Parliament early this month.

"The new rate of CST will pave way for cut in taxes on various commodities bought through inter-state trade, apart from crossing another milestone toward national tax system," said a senior official of the finance ministry.

The notification to amend the CST Act has also empowered states to levy VAT at the rate of 12.5 per cent on tobacco products such as cigarettes, bidis and pan masala with tobacco -- currently in the list of additional excise duty.

As part of the agreement between the Centre and states, the latter would also get 100 per cent share of taxes on 33 services from Centre.

If states do not meet losses due to one per cent cut in CST, expected to be over Rs 6,000 crore (Rs 60 billion) annually, the Centre has kept Rs 2,500 crore (Rs 25 billion) as budgetary support for states.

This support could be enlarged or reduced, depending upon the realisation of tax on tobacco products and their increased share in services tax, said the official.