In an attempt to stop states from levying local sales tax on inter-state transactions, the Centre has told Rajasthan that only central sales tax can be levied on crude oil sold from Cairn India's fields in the state to refiners elsewhere.
Rajasthan wants to charge 3 per cent higher state sales tax or VAT on 8.75 million tonnes a year of peak output from Cairn's Barmer district fields despite oil being consumed or processed at refineries outside the state.
Petroleum Secretary R S Pandey last month wrote to Rajasthan chief secretary Kushal Singh saying: "State sales Tax/VAT would accrue to Rajasthan government in case the sale of crude oil is made for further processing within Rajasthan."
State refiners Indian Oil, Mangalore Refinery and Hindustan Petroleum have been nominated to buy crude from Cairn but none of them has refineries in Rajasthan and will necessarily have to transport the oil to their units outside the state for processing.
"(One per cent) central sales tax would accrue to Rajasthan government if the sale is made in Rajasthan and crude oil has to be necessarily carried outside for refining," Pandey wrote. "CST is however due to be abolished by March 31, 2010."
The move by Rajasthan may set a dangerous precedent wherein mineral producing states like Jharkhand may insist on payment of local sales tax even if resources such as coal is sold and consumed outside the state.