The loss to the manufacturing states shall be due to following reasons.
1: Loss of Central Sales Tax (CST) :- The States have power to tax only the sales of goods taking place within their states. The power to levy taxes on inter-state movement of goods is given to the Centre Government by the Constitution of India, which has levied @2% in the form of CST. CST is levied by Centre Government, but collected and appropriated by State Governments. CST is a origination based tax, which is collected at the time of clearance of the goods from the factory. For example, if cars are manufactured in Chennai but sold all over the country, only TN Government will get all the CST irrespective of the place of sale of cars. However, GST is a consumption based tax, and the states where the goods are finally consumed only will get the tax. Hence there will be no CSTto the manufacturing states on inter-state movement of goods and they will lose revenue.
2: Tax Credit on inputs purchased from other states :- A manufacturer uses a large number of items manufactured in other states for producing his final product. Today, no tax-credit is available on such items. This will be available in GST and hence the revenue paid by the manufacturer shall also be reduced to this extent.
[Explanation: GST/VAT/CExcise/Service Tax are charged on value addition only. For example, if the rate is 10% on all items, the value of finished product is RS 100 and the value of the inputs used to make that product is Rs 50; you should pay tax only on the value addition viz. Rs 100-50=50 at the rate of 10% i.e. Rs 5.
This is achieved by giving you credit of the duties/taxes paid on all inputs. So when you pay 10% tax on your finainshed product i.e. Rs 10, you are allowed to use the credit of all inputs i.e. 10% of Rs 50 = Rs 5. Hence you pay Rs 5 as cash and Rs 5 from your input tax credits on inputs and your net liability is only Rs 5 which is euqal to the tax on value addition.
When you are not allowed credit on inter-state movement of goods, you can't get credit for this amount and you end up paying tax on full value i.e. Rs 10 in this case. ]
3: Tax Credit of Input services At present the service tax credit is not given credit for payment of taxes by the manufacturers. In GST regime, all goods and services credit shall be available to the manufacturers. Hence their tax liability will considerably be reduced while discharging their final GST.
All these factors are likely to reduce the tax collection of the states like Tamil Nadu, Gujarat Maharastra etc. However, they will gain revenue by taxing the services which they can’t do in the present taxation laws
