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The GST Council, in its next meeting, will take a call on a special tax rate or cess for Kerala to raise additional resources.
For the first time after GST was introduced in July 2017, a State will seek additional resources through increased tax rates.
“The issue is what can be considered — a special rate or cess?” a senior Finance Ministry official said. “The law has provisions for both. Now it is up to the GST Council to decide.”
Since the Centre and States have pooled their sovereignty in terms of deciding on indirect tax rates in the GST Council, the final call will be taken by the Council on any demand by a State.
Flood-hit Kerala is seeking additional resources to meet the cost of rehabilitation and reconstruction.
Kerala’s Finance Minister TM Thomas Isaac told BusinessLine he is going to approach the GST Council for the imposition of a cess to raise additional resources.
The State’s Cabinet, in its meeting on August 21, had approved the proposal for a 10 per cent cess.
The Central and State laws have a permissible limit of 40 per cent (without cess) for GST, while the current maximum rate is 28 per cent.
Following a Constitutional amendment, sub-section (4) (F) of newly inserted article 279 A prescribes: “Any special rate or rates for a specified period to raise additional resources during any natural calamity or disaster.”
Similarly, the schedule of the Goods and Services Tax (Compensation to States) Act, 2017, provides for the imposition of cess up to the rate of 15 per cent ad valorem on “any other supplies”. However, there is no clarity in the text of the law on imposing a cess for purposes other than compensating States in case there is a revenue shortfall.
A State Finance Minister pointed out that the proposal for cess for purposes other than what is prescribed is the key.
“Earlier, a similar dispensation was sought to meet the liabilities of sugarcane farmers, but no decision could be taken as the Solicitor General (SG) is yet to give his views. The SG was asked to give his view on the imposition of cess apart from what is mentioned in the Act,” he said, adding that the SG’s view will be critical to decide on Kerala’s demand.
Calamity tax
Experts are divided over additional revenue measures. MV Mani, Partner at Deloitte India, said: “It would not be advisable to alter the GST architecture, hence it would be better to have a temporary calamity tax unlinked to GST.”
He, however, cautioned that higher rates of GST in Kerala would not only adversely affect tourism and industry, but also create a precedence of different SGST rates for the same product across States, which was the position prior to GST.
Anita Rastogi, Indirect Tax Partner at PwC, supports the imposition of a cess.
“A cess is really the solution as it is allowed as per the Constitution. Under exceptional circumstances the government can levy a cess to garner additional revenue which can be utilised only for that specific purpose. In this time of need a purpose-driven cess for rehabilitation of Kerala should be considered,” she said.
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