Tamil Nadu has asked the Government of India to provide compensation till Goods and Service Tax (GST) was introduced as the revenue loss suffered by states was substantial and permanent.

It also said non-implementation of GST from April 1, 2010, should not be taken as a ground to stop the Central Sales Tax (CST) compensation.

In a letter to the Prime Minister, chief minister J Jayalalithaa said the chairman, empowered committee of state finance ministers, had already conveyed the objections of state governments, including Tamil Nadu. But it is unfortunate that the Government of India is still sticking to its unreasonable stance.
Though the Government of India had agreed to compensate states for the revenue loss for 2010-2011 also, the eligible compensation for 2010-2011 was arbitrarily restricted by deducting the additional revenue realised through the revision of value-added tax (VAT) rate from four per cent to five per cent.

I would like to point out that the action of the Government of India in linking CST compensation with the additional revenue on account of VAT rate revision is unilateral, arbitrary and untenable. There is no link between CST rate reduction and VAT rate enhancement. It was never a part of the guidelines for CST compensation, she stated.

The decision to stop CST compensation from 2011-2012 is equally objectionable, she said further.

The CST rate was reduced only as a precursor to the introduction of GST. Since, it is the Government of Indias responsibility to introduce GST by evolving a consensus and by putting in place appropriate mechanisms, states cannot be expected to bear the loss on account of its failure to introduce GST, it said.

Moreover, they are suffering huge revenue loss on account of the CST rate reduction. In fact, our state could have realised an additional revenue of Rs 2,000 crore between 2007-08 and 2010-11, even after taking into account the Government of Indias compensation.

This tax loss pushed back the revenue base to a lower level and the state continues to suffer incremental revenue loss, which will be in the range of Rs1,500 crore to Rs 2,000 crore per annum in the next three years.

If further delay is expected in implementing GST, then the CST rate must be restored immediately to the original four per cent, she said.