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Above: Post-floods, Kerala needs funds for rehabilitation and rebuilding infrastructure/Photo: UNI

Is Kerala’s demand that it be allowed to impose a cess on GST in order to mobilise resources in the aftermath of the floods valid? Will other states make similar demands?

By Sumit Dutt Majumder

Should Kerala be permitted to impose a cess on the State GST (SGST) in cases of intra-state supply of goods and services? This is a debate that has been triggered in the light of the devastating floods that struck the state and the consequent need for funds to rehabilitate people and rebuild infrastructure.

It may be recalled that GST has three components—Central GST (CGST), State GST (SGST) for supply within the state (intra-state) and Integrated GST (IGST) which is a combination of CGST and SGST for supply across states (inter-state).

There is no doubt that Kerala needs additional resources to rebuild itself. But there are three issues here. The first is whether current legislative pro­vi­sions allow imposition of such a cess. Secondly, if not, whether legislative amendments or an ordinance would be issued considering the urgency of the matter. Thirdly, whether it would be wise to take the GST route for raising additional resources as this would mean altering the GST architecture and may lead to other states also demanding a change in SGST rates on similar grounds.

On the first issue, Article 246A of the Constitution allowed for introducing GST, while Article 269A dealt with levy and collection of GST in the case of inter-state trade or commerce. Both these Articles allow the authority to levy GST, but there is no mention of levying cess. Rather, Clause 4(f) of amended Article 279A talks of special rates for a specified period. It reads: “The Goods and Service Tax Council shall make recommendation to the Union and the States on any special rate or rates for a specified period, to raise additional re­sour­ces during any natural calamity or disaster.” It does not mention cess.

Further, GST laws such as CGST Act, SGST Act, IGST Act, etc, clearly state that cess “shall have the same meaning as assigned to it in the Goods and Ser­vices Tax (Compensation to States) Act”. Section 2(1)(c) of this Act states that cess means the GST compensation cess levied under Section 8. Section 8, which covers levy and collection of cess, explains, inter alia, that cess will be levied “for the purpose of providing compensation to the States for loss of revenue ….” On the first issue, it is thus clear that the existing legislation provides for levy of cess for the purposes of compensation only and not for any other purpose.

On the second issue of further amendments or promulgation of an ordinance, there may not be any such need as Article 279A has already empowered the GST Council to make recommendations to the centre and states about any special rate or rates for a specified period to raise additional resources during a natural calamity or disaster. A situation like the devastating Kerala floods definitely qualifies for that. If the GST Council agrees, a special rate of, say, an additional two percent can be added to the current SGST rate for intra-state supplies of goods and services in Kerala. In that case, any item where there is currently six percent CGST and six percent SGST, the SGST rate will become eight percent. Thus, Kerala will have an additional two percent of SGST revenue. Trade and industry may not protest against this as they will be availing of input tax credit for that additional two percent of SGST. Of course, the ultimate tax burden will fall on consumers in Kerala.

The advantage is that this will not require any legislative amendment. The GST Council can have its meeting immediately through video-conference facility as has been done before. Kerala may prefer the cess route as the taxpayer does not get any credit for the cess paid by him, and therefore, the net revenue collection would be more. But that will bring distortion in the GST scheme. Besides, in the absence of credit facility, trade and industry would protest. Even otherwise, Kerala is not a highly industrialised state. So, industry should not be inconvenienced any more.

Above all, imposition of such a cess will necessitate amendment in GST laws. As explained, the cess referred to in current GST laws is only in respect of compensating the states. Thus, it would be advisable not to take the cess route, and it would be better to collect the additional GST through the special rates of SGST for Kerala which will not re­quire any legislative amendment, but only a GST Council recommendation.

On the third issue of raising funds through the GST route, concerns have been expressed by many that opting for this route would be tantamount to altering the GST architecture. This would bring in distortions, and open the floodgates for other states too to press for a change in their respective SGST rates on some pretext or other. Eventually, that would lead to the pre-GST era when different states had different VAT rates.

These concerns can be duly addressed. First of all, the proposal will not change the architecture of GST as conceived in India, inasmuch as the Constitution itself has provided for having a special rate to raise additional resources during a natural calamity. Having said that, care also has to be taken to ensure that there is no subjectivity in deciding what would constitute “natural calamity or disaster” in order to be eligible to have a special rate of SGST or CGST. The present case has provided an opportunity to examine this issue and lay down the parameters. Once that is done, apprehensions regar­ding creating a precedent and opening the floodgates for similar demands would be belied.

Kerala does need additional resour­ces, and the centre may not be able to help much from its own resources in view of the shortfall in its own GST revenue collections. Therefore, in the spirit of “cooperative federalism”, which has been a hallmark of the Indian GST, Kerala may be allowed to levy an additional amount of SGST for a specified period for the exclusive purpose of utilising this additional revenue in rebuilding itself.

The writer is former chairman, Central Board of Excise and Customs, and author of GST explained for Common Man (under print)

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