A Group of States’ Finance Ministers is in favour of a special rate of SGST (State Goods and Services Tax) to mobilise additional revenue in case of natural calamity or disaster. Such a move, once formalised, will help Kerala, to begin with.

“There is a consensus that a State-specific SGST can be levied,” Sushil Kumar Modi, Deputy Chief Minister of Bihar and Convenor of the Group, told BusinessLine .

The group will meet before the 32nd meeting of the GST Council next month and formally finalise the recommendation. The recommendation will then be placed before the Council for the final decision. The entire process is expected to be completed by the third week of January.

The group was constituted in September after flood-hit Kerala sought levying cess. 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 levy should be State-specific or across the country. Modi said that it will be impractical to levy nationwide. Also, there will be distributional issues.

The matter of additional revenue mobilisation mechanism arose after Kerala State’s Cabinet, in its meeting on August 21, approved a proposal for a 10 per cent cess to get more resources for meeting the cost of rehabilitation and reconstruction after the floods caused havoc in the State. It approached the GST Council for imposition of a 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.

Constitutional amendment

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 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 a 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. Keeping this in mind, opinion favours a State-specific levy.

If the GST Council approves State-specific levy, it would be the first such instance after the introduction of the new indirect tax regime from July 1.

However, experts are not excited over such a move. MS Mani, Partner at Deloitte India, felt it is preferable not to tinker with the SGST rates and undo the uniformity in State rates, which has been reached after many years. “Any alterations in the rates to address a specific situation could become a precedent for other States/situations, and over a period, there would once again be a divergence in rates leading to difficulties for businesses. It is preferable to design an alternative mechanism to take care of such situations,” he said.

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