Can Goods and Services Tax framework come to flood-wrecked Kerala's aid?

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.