Tamil Nadu State and the Indian Central Government Sales Tax Compensation

V. P. Govindarajan

TAMIL TRIBUNE, October 2013 (ID. 2013-10-01)
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CST - Central sales tax

VAT - Value added tax

Tamil Nadu and other states are again hit with another revenue reduction thanks to Indian government actions. This short article relates to central sales tax (CST).

Sales tax on inter-state sales is levied by the Indian (central) government under Entry 92A of List I (Union List) and this is called the central sales tax (CST). Although CST is levied by the Indian Government, the state from which movement of goods commences gets revenues from the tax. Indian government reduced the central sales tax (CST) from 4% to 3% in 2007-2008 and then to 2% in 2008-2009. This reduction in CST meant states getting reduced revenues. So the Indian government agreed to compensate the states for the lost revenue and the amount of compensation was set and agreed by state governments. This is known as CST compensation to states. In the ensuing years, however, the government reduced the CST compensation unilaterally.

In a letter to Indian Prime Minister Manmohan Singh in April 2012, Tamil Nadu State Chief Minister Jayalalithaa complained about this reduction. She said that the revenue loss to the state is "substantial and permanent". She added that the compensation rate was arbitrarily reduced by deducting the additional revenue realized through the revision of Value Added Tax (VAT) rate from 4% to 5%. She wrote, "There is no link between CST rate reduction and VAT rate enhancement. It was never a part of the guidelines for CST compensation." West Bengal chief minister Mamata Banerjee has also complained to the Prime Minister about the same issue.

Indian government reducing the compensation to states means more money staying in Indian government coffers. Over the past decades ever since independence, disproportionately more of Indian government funds are spent on Hindi belt states than on non-Hindi states. Requests from Tamil Nadu that that there be more fiscal devolution to states is met with silence.


Economic Discrimination of Tamil Nadu

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