Sales tax, Tamil Nadu and India

Indian Government Interferes in State Sales Tax

V. P. Govindarajan

TAMIL TRIBUNE, March 2000 (ID. 2000-03-03)

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1. Introduction

2. A Hit on Tamil Nadu's Computer Industry

3. Help for the Jewelry Industry

4. Tamil Nadu's Textile Industry Takes a Hit too


Hindians - People whose mother tongue is Hindi (similar to Tamil speakers are sometimes referred as Tamilans or Tamilians).

1. Introduction

Sales tax comes under the exclusive jurisdiction of state governments per Article 246 of the Indian Constitution. It is one of the very few taxes that states can levy. State governments set different tax rates for different goods, based on the specific needs of state's people, businesses and industry. This is not unique to India. It is true in Canada, United States of America, etc.

Until recently Indian government did not interfere in the sales tax area. Recently it suggested that all states levy a uniform minimum tax. State governments expected that a consensus of the states would be sought; they did not expect the Indian government to set a sales tax structure and impose it on the states. But that was what happened. The Indian government came up with a sales tax structure that benefits the Hindi states and is harmful to some of the non-Hindi states. We can see a clear pattern of this when we go through the list of goods and the corresponding sales tax dictated by the Indian government. We will give here three examples to illustrate this.

2. A Hit on Tamil Nadu's Computer Industry

Tamil Nadu and a few other non-Hindi states are at the forefront of computer software industry in the Indian subcontinent. Not only major American and European computer companies are setting up offices in Tamil Nadu, but small entrepreneurs from Tamil Nadu are also starting their own software companies and contract firms. Hindi states of Uttar Pradesh and Madhya Pradesh are at the bottom of computer software development. The new sales tax structure imposed by the Indian government, dominated and controlled by Hindi politicians, is a threat to the growth of computer software industry in Tamil Nadu. Let me elaborate on it.

Growth of software industry depends on an adequate supply of qualified software professionals and capital for computer equipment purchases. Tamil Nadu has an adequate supply of software professionals. Unlike heavy industries such as steel and automobiles, capital requirements to start and run a software development company is small. That is why local entrepreneurs in Tamil Nadu are successful in the burgeoning software industry. Still some capital is necessary to buy computers and peripherals. So Tamil Nadu government has set the sales tax for computers and peripherals relatively low to ease the burden on software industry entrepreneurs. The new Indian government imposed sales tax structure increases electronic goods spares tax from 2% to 12%, computer paper from 4% to 8%, uninterrupted power supply systems (a vital need for software companies) from 2% to 8%, etc.

This Indian government dictated new sales tax rates would have a negative impact on locally owned software industry in Tamil Nadu. Growth will be blunted because of increase start up capital costs. Small local entrepreneurs may be forced to get loans from northern, Hindi-speaking financiers who dominate other industries in India and are so far kept out of Tamil Nadu's software industry. Now you see why the Hindians forced Tamil Nadu to raise the sales tax on equipment needed for software industry.

Without the interference from the Indian government in sales tax and import-export taxes that are tilted in favor of Hindi lands, Tamil Nadu would have a much robust software industry. This is something Tamil software professionals should think about.

3. Help for the Jewelry Industry

Let us give an example of how the new sales tax rates are structured to help the Hindi states and nearby Hindi-belt areas. The new sales tax structure will reduce sales tax on jewelry from 4% to 1%. While sales tax on computer products that are important to the growth of Tamil Nadu's burgeoning software industry is increased 2 to 3 times (see Section 2), tax on jewelry is reduced to one-fourth. Why?

Some of the major gem and jewelry centers are located in around the Hindi belt Also, go around Tamil Nadu capital city Chennai and look at the bigger jewelry stores. Every one of these bigger jewelry stores is owned by Hindi-speaking out-of-state businessmen. See, how the new sales structure benefits the jewelry industry dominated by Hindi-speaking businessmen and harms the software industry where they are not dominant.

4. Textile Industry Takes a Hit

Textile industry in and around Coimbatore, Tamil Nadu is the source of livelihood for several hundred thousand workers. They do a good job and our clothing have received consumer acceptance in European markets because of the price and quality. The Indian government imposed tax structure increases the sales tax on raw material needed for textiles. Sales tax on cotton and synthetic fiber are increased from 2% to 4%. This would surely increase the price of our textile products and reduce the market share in Europe and elsewhere, thus leading to unemployment in and around Coimbatore.

UPDATE: (May 2002)

Following the publication of the article in March 2000, some people criticized me saying that I was nitpicking on things and that the new sales tax structure does not hurt Tamil Nadu.

More than a year and a half has passed now. We now know how much harm the Indian Government imposed sales tax structure is doing to Tamil Nadu and Pondicherry Union Territory. On February 4, 2002, Chief Minister of Pondicherry, Mr. N Rangasamy, told that Pondicherry had incurred an annual loss of 60 crore Rupees (600 million Rupees) because of the Indian Government imposed sales tax structure.

Tamil Nadu Finance Minister Mr. Ponnaiyan had already told the Tamil Nadu State Assembly, on September 11, 2001,  that the new sales tax is adversely affecting Tamil Nadu economy. He did not give any figures. Tamil Nadu's economy is much larger than the small Pondicherry (Pondicherry is even smaller than a district in Tamil Nadu). Given the relative size of the economies, it is reasonable to estimate that Tamil Nadu loses at least 600 crore Rupees (that is, 6 billion Rupees) every year because of the Indian Government dictated sales tax structure. 

Because of lack of funds, Tamil Nadu State Government had to make deep cuts in many programs like school meals program, free clothing for the elderly poor, etc. as well as cuts in infrastructure development programs like road maintenance, drinking water supply schemes, etc. that affect everyone. If we do not lose Rupees 600 crore every year, some of these cuts could have been unnecessary. So people of Tamil Nadu are suffering because of the biased sales tax structure that Hindian dominated Indian Government forced on us.

----    2000-a1d

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