Most of the VAT legislations in India do not allow the set off of CST Paid against their output tax. But at the same time, these legislations allow set off of Input Tax credit against the CST due. As a common man, a question may arise why this is not allowed vice-versa. The reason is as follows :-
Sales tax is a source of revenue for each state. CST is collected by the appropriate state, which is the state in which the selling dealer’s place of business is located.
Thus, if a dealer in Tamilnadu makes inter-state sale to a dealer of Maharashtra, the CST on such sale will be collected by the state of Tamilnadu.
If the credit on such CST is allowed to the dealer of Maharashtra again VAT payable to the state of Maharashtra, then the revenue of the state of Maharashtra will get reduced. HENCE THE CREDIT IS NOT ALLOWED.
However the Dealer of Tamilnadu can very well use the VAT credit of purchases made from the state of Tamlinadu against the payment of CST on inter-state sales, as the VAT was paid to the state of Tamilnadu only and CST against which is set-off is also payable to the state of Tamilnadu.
There will be no loss of any revenue to the state of Tamlinadu.
Moreover, the Collection and Assessment CST is administered by the State Governments for which a share of CST collected is passed on to the States. If the set off is allowed, it will be a revenue loss to the State Government without a benefit to the state for doing the work on behalf of the Central Government.
Let us hope introduction of GST (Goods and Services Tax) will address this issue for the benefit of the assessees who buy and sell Inter-state.