GST Council considering Kerala government's proposal of 'calamity tax'

The GST Council is expected to deliberate on a special tax or cess to raise additional resources aimed at meeting the cost of reconstruction in Kerala in the aftermath of floods. This is the first time after the implementation of the GST in July 2014 that a State has sought additional resources through a higher tax rate.

A Finance Ministry official told The Hindu BusinessLine that the law has provisions for the introduction of both a special tax as well as a cess. The council is undecided on which route to take in order to meet the state’s demand for aid.

The centre and states have pooled their sovereignty on matters regarding indirect taxation after the advent of the GST. However, the final call on the introduction of an additional tax will be taken by the centre.

Kerala, which witnessed the worst natural disaster in almost a century, will need additional resources to rehabilitate the displaced, and rebuild public infrastructure damaged in the floods. The state’s finance minister T M Thomas Issac told the news daily that the Kerala government was going to approach the GST Council for the levying of a cess to meet the additional requirement for funds.

In a cabinet meeting held on August 21, the Kerala government approved a proposal for a 10 per cent cess. The permissible limit for taxes, as established under the federal laws enshrined in the GST, is 40 percent. This is not inclusive of cess. The current maximum rate is 28 percent.

Article 279 A of the tax law was changed after a constitutional amendment to allow “special rate or rates for a specified period to raise additional resources during any natural calamity or disaster.”

The GST Act, 2017, sets a ceiling of 15 percent on the imposition of cess. There is as yet no clarity on the imposition of a cess for purposes other than compensating states for a shortfall in revenue arising out of the transition to the GST regime.

Similarly, a cess was touted to meet the liabilities of sugarcane farmers, but decision-making in this regard reached an impasse. The Solicitor General (SG) is yet to present his views. In the case of Kerala, the SG’s opinion will be key in the realization of either a tax or cess, over and above the prevailing GST rates.

The introduction of a calamity tax could be introduced as a temporary provision. Experts are of the opinion that the GST architecture should not be tampered with, as it will lead to demands from other states as well, increasing the tax burden and complicating the existing norms.

A hike in tax, and ancillary cess could impact the tourism industry, a mainstay of Kerala’s economy. Moreover, a calamity tax would create the precedent for the same product taxed differently across states. This would be seen as regressing from the gains accrued under the GST in simplification of the tax structure across the country.

The contrarian view is that the charging additional cess under new heads is allowed as per the constitution. In exceptional circumstances, governments are allowed to levy extra cess to tide over the difficult financial situation.