Can Goods and Services Tax framework come to flood-wrecked Kerala’s aid? | Business Standard

Op-Eds by Tax Law · October 26, 2018
Author(s): Vidushi Gupta and Vinti Agarwal

In a recent Cabinet meeting, the Kerala government decided to approach the Goods and Services Tax (GST) Council to seek imposition of a 10 per cent cess on State GST (SGST) to fund re-construction activities for the floods. While no formal proposal has been tabled yet, the legality of such a levy has come under the scanner. Vidushi Gupta and Vinti Agarwal, research fellows at Vidhi Centre for Legal Policy, analyse the GST framework to answer some pertinent legal questions

What is a cess and is it recognised under the Constitution?

A cess is generally treated as a tax imposed for an earmarked purpose. The term ‘cess’ is recognised under Article 270 of the Constitution for the distribution of tax between the Union and states.

Can a cess be levied over and above GST?

While the Constitution recognises it as a concept, there is no provision from which the explicit power to levy a cess can be derived. Under the erstwhile indirect tax regime, the power to impose such a levy was read into the Centre’s and states’ general power to tax.

At present, Article 246A grants the Centre and states concurrent powers to make laws regarding goods and services tax. The expression ‘goods and services tax’ has been further defined in Article 366(12A) as ‘any tax’ on the supply of goods or services.

A wide interpretation of these provisions may lead to the conclusion that a cess falls within the ambit of ‘any tax’ and accordingly, Article 246A empowers both states and the Centre to impose such a levy over and above GST.

What are the implications of allowing Article 246A to be broadly interpreted?

The GST was implemented with an aim to facilitate the formation of a nationwide market by eliminating multiplicity of taxes, and consequent cascading. Various amendments have been made to the Constitution that underline this intent. For instance, Articles 271 and 248 were amended to restrict the government’s power to levy a surcharge and invoke residuary provisions to impose a further tax on goods and services covered under the GST.

Given that Constitutional provisions should be interpreted harmoniously and in accordance with the lawmakers’ intent, reading Article 246A to allow the imposition of additional cess would run counter to these amendments and their intended effect. It would act as a precedent to allow the levy of similar impositions in the future, consequently diluting the purpose behind the GST.

Currently, is any cess being levied over and above GST?

The compensation cess is the only cess that is currently levied under a special provision of the Constitution (Hundred and First Amendment) Act, 2016. However, this levy has been challenged before the Bombay High Court. Earlier this year, a proposal to levy sugar cess was mooted but was later abandoned.

What are the other alternatives that may be explored by Kerala under the GST regime?

Article 279A(4) lists the issues on which the GST Council can offer recommendations. Sub-clause (f) allows the Council to suggest special rates to raise funds during natural calamities. Thus, the Council may increase the rate of SGST applicable in Kerala while maintaining the other rates constant, though the effective SGST rate must be restricted to 20 per cent.

It may be argued that the imposition of a distinct rate of tax on supplies in one state would negate the GST’s objective of maintaining a uniform indirect tax structure. Article 279A(6) may also lend support to this argument as it requires the Council to be guided by the need for a harmonised national market. Another cause for worry may be the unequal bifurcation of the consolidated GST rate between the Centre and state.

While these concerns are valid, it is imperative to recognise that the Council’s power under Article 279A(4)(f) is an exception and is to be exercised only during natural disasters, for a specific period.

In light of the uncertainty over the legal validity of cess, and the existence of a special provision in case of natural calamities, a better option for the Kerala government would be to seek an increase in SGST rate for a specified period, as opposed to a cess.

Originally published –

About Vidushi Gupta:

Vidushi is a Research Fellow with the Tax Law vertical. She is interested in facilitating reforms in India’s tax landscape and focuses on issues relating to goods and services tax, income tax and international tax. At Vidhi, she has assisted the Central Board of Indirect Taxes and Customs, the Department of Revenue, the Finance Commission, and the Goods and Services Tax Network on a range of projects, including simplification of goods and services tax compliance and increasing adoption of digital payments. Vidushi graduated with a B.A.LL.B.(Hons.) from Dr. RML National Law University in 2014. Prior to joining Vidhi, she was working at PwC as an Assistant Manager in the Tax and Regulatory Services division, where she provided indirect tax advisory, litigation and compliance services various multinational clients.

About Vinti Agarwal:

Vinti is a Research Fellow in Tax Law vertical. At Vidhi, she is involved in a project relating to imposition of cess and surcharge, post the introduction of GST. Additionally, she also undertakes assignments relating to Goods and Service Tax and other tax laws in India. She graduated with B.B.A.LL.B. from National Law University, Odisha in 2018 with a Batch Rank 2 out of 120 students. During her time there she served as a member in the Editorial Board for Indian Journal for Tax Law. She is primarily interested in Tax Law and Regulatory Law, in pursuance of which she has garnered accolades in mooting.