The Group of States’ Finance Ministers (GoFM) will recommend to the GST Council to consider allowing flood-hit Kerala to levy a cess at the rate of 1 per cent to fund rehabilitation and resettlement processes.

“The cess will be for a maximum of two years,” Sushil Kumar Modi, Deputy Chief Minister of Bihar and Chairman of the GoFM, told reporters here after the meeting. The GST Council, at its meeting on January 10, will consider the proposal. If approved, Kerala will become the first State to levy a cess after the introduction of the new indirect tax regime.

Borrowing limit

Thomas Issac, Finance Minister of Kerala, who is also a member of the GoFM, said that its other request — to allow the State to borrow over and above FRBM (Fiscal Responsibility and Budget Management Act) — is pending. “Excess borrowing should depend on the extent of calamity,” Issac said while Modi added that the Centre and States will together decide on increasing it. At present, the limit is 3 per cent of SGDP which can be relaxed under special circumstances.

The FMs’ Group was constituted in September after flood-hit Kerala sought permission to levy the cess. The Ministers’ Group It was asked to examine six issues, including whether there should also be a supplementary mechanism for funding natural calamities and disasters through the GST, and if so, whether it should be through additional cess or tax and whether such a levy should be State-specific or across the country. Modi said that it will be impractical to levy the cess nationwide. Also, there will be distributional issues.

The matter of an additional revenue mobilisation mechanism arose after the Kerala Cabinet, at its meeting on August 21, approved a proposal for a 10 per cent cess to mopping up resources to meet the cost of rehabilitation and reconstruction after the flood havoc. It approached the GST Council for imposing the cess. Since the Centre and States have pooled their sovereignty in terms of deciding on indirect tax rates in the GST Council, the final call can be taken by the Council on any demand by a State.

The Central and State laws have set a permissible limit of 40 per cent (without cess) for the GST, while the current maximum rate is 28 per cent. Following a Constitutional amendment, sub-section (4) (F) of the 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 to the Goods and Services Tax (Compensation to States) Act, 2017, provides for imposing a cess up to the rate of 15 per cent ad valorem on “any other supplies”. However, there is no clarity in the law on imposing a cess for purposes other than compensating States in case there is a revenue shortfall. Keeping this in mind, opinion favours a State-specific levy.

No consensus on MSME relief

Separately, another ministerial panel under Minister of State for Finance Shiv Pratap Shukla, on giving relief to MSMEs under GST, deliberated on the exemption threshold for such businesses. But the panel could not reach a consensus for specific threshold.

While some States favoured the limit should be hiked to turnover of up to ₹40 lakh, others wanted it at ₹50 lakh.

Another suggestion was that for MSMEs with turnover between ₹50 and ₹60 lakh, GST of ₹5,000 be levied, and those between ₹60 lakh and ₹75 lakh, GST should be ₹10,000.

At present, businesses with turnover of up to ₹20 lakh are exempt from GST. For businesses in special and hilly States, the exemption limit is up to ₹10 lakh.