The Central Government is contemplating the introduction of a calamity cess on the Goods and Services Tax (GST), drawing inspiration from a similar move by Kerala in 2019. The decision stems from the need to handle the economic crisis that has resulted from the COVID-19 pandemic. The government of India is looking forward to raising additional revenue by levying this cess on GST, barring goods and services falling under the 5% slab.
The Precedent Set by Kerala
In 2018, post the monsoon floods, Kerala introduced a disaster relief cess. It enforced a 1% calamity cess on GST for a two-year period starting from 1st August 2019. Kerala remains the only state to implement such a cess, utilizing the provision under Section (4) (f) of Article 279 A of the Constitution.
Legal Provisions Leveraged
Article 279A (4)(f), inserted via the 101st Constitutional Amendment Act in 2016, permits both the Union and the State to garner additional resources during any natural calamity or disaster. The GST (Compensation to States) Act of 2017 further allows for the execution of cess up to a rate of 15% ad valorem or based on estimated value on specific supplies. This act also provides for compensation to the states due to any revenue loss arising from the introduction of the GST.
Complications Involved
However, the proposal presents certain complications. At a time when the manufacturing industry is grappling with the crisis born out of the COVID-19 lockdown, imposing an additional cess on GST could aggravate matters. This could lead to an increase in product costs and subsequently, a reduction in demand. The already faltering GST collection, due to the closure of numerous economic activities, might take another hit.
Understanding Cess
Cess is a form of tax levied over and above the base tax liability of a taxpayer and can be applied to both direct and indirect taxes. Governments resort to it when they need to raise funds for specific purposes, such as education, disaster relief, or initiatives like cleaning rivers. For instance, the Swachh Bharat Cess was introduced in 2015 to fund a national clean-up drive. This is not a permanent source of income for the government and is discontinued once its objective is achieved.
Distinguishing Cess from Tax
Cess differs from taxes like income tax, GST, and excise duty, as it is charged on top of the existing taxes. It has to be allocated strictly to the cause it was gathered for. Unspent in a particular year, it cannot be reallocated but carried over to the next fiscal. The central government does not share this cess with state governments. Its introduction, modification, and abolition entail a simpler procedure compared to ordinary taxes, which usually require legal amendments.
Possible Approach to Imposition of Additional Cess
The imposition of additional cess on GST can be considered after 6-7 months when the country’s economic situation stabilizes. Meanwhile, states can turn to alternative monetary instruments like borrowing and increasing Ways and Means Advances (WMA), overdraft, etc, to boost their income. They might also think about levying a cess on ‘sin goods’, i.e., goods deemed harmful to society and individuals, such as alcohol, tobacco, candies, drugs, soft drinks, fast foods, and the like.
