A German court gave its backing yesterday to a decree by the country's Catholic bishops declaring that believers who refused to pay an eight per cent church tax could not be considered Catholic and would automatically lose the right to receive Holy Communion and a religious burial.

The verdict, which was delivered by Germany's chief administrative court in Leipzig, was a bitter defeat for Germany's grass-roots Catholics and conservative church campaigners who had denounced the bishop's decree as "pay and pray" and claimed it sent "the wrong signal".

The Leipzig court rejected the case brought by Hartmut Zapp, a retired canon law professor, dubbed "the church tax rebel", who had insisted on his right to remain a Catholic without having to pay church tax.

But the Leipzig judges ruled that in Germany it was "not possible" to stop paying church tax and remain a member of the Catholic Church. It added that the state was obliged by law to tax church members but stressed it was up to the Church to decide how to deal with those who refused to pay.

The ruling was welcomed by Germany's Catholic bishops who said it had finally dispelled the notion that individuals could belong to a church without paying church tax.

"Whoever leaves the Church leaves it completely," insisted the Reverend Hans Langendorfer, a Catholic Church spokesman on German television's ARD channel.

The German state has collected a religious tax on individuals registered as Catholics, Protestants and Jews since the 19th century. The revenue is then funnelled back to the respective religious bodies.

The levy amounts to between eight and nine per cent of an annual income tax bill and for the Catholic Church it amounts to one of the biggest sources of funding worldwide.

The Leipzig court's ruling followed a controversial decree issued only days before by Germany's Catholic bishops. It spelled out severe sanctions for those who failed to pay their church tax. But it stopped short of mentioning full excommunication – the ultimate sanction in the Catholic Church.

The bishops stressed that non-payers could no longer be considered Catholic and would automatically be banned from receiving Holy Communion, working in church schools or hospitals and taking part in parish activities. They also stated that without a "sign of repentance before death" religious burial could be refused. Opting out of the tax would also bar individuals from becoming godparents to Catholic children, they added.

The bishops' decree was criticised by a conservative Catholic group called the Union of Associations, which is loyal to the Pope. "So sacraments are for sale – whoever pays the Church can receive the sacraments," the group said in a statement which accused the bishops of going "beyond the sale of indulgences" Martin Luther denounced at the beginning of the Reformation.

Critics have pointed out that the bishops' decree was partly a response to the crisis in the Catholic Church in Germany. Catholics make up around 30 per cent of the population but the number of believers leaving the Church runs at well over 100,000 annually – not least because of a recent scandal exposing widespread sex abuse by the Catholic clergy.

The bishops' ruling has also been interpreted as an attempt to resolve a long-standing disagreement between the Catholic Church in Germany and the Vatican over church taxes.

German bishops had previously warned believers that they would face excommunication if they failed to pay taxes. However, the Vatican ruled in 2006 that the penalty could not be imposed merely because someone had declared to a tax office that they were leaving the Church – they also had to declare this to a priest, it said.