DS Mahajani *DS Mahajani

Please read the following three News headlines carefully –

(1) “GST will Reduce Prices in the Long Run”: Arun Jaitley in Lok Sabha | 6th May 2015.

(2) “If it (GST) is going to create India into a one unified market and (promote) free flow of goods and services, facilitate free trade, going to improve revenues of the states, going to improve revenues of Centre, going to improve India’s GDP, then nobody should get a thrill in delaying GST,” the Finance Minister said in Lok Sabha | 15th May, 2015.

(3) “GST will end cobweb of various taxes”: Arun Jaitley – PTI | Jul 5, 2015,

On reading the above headlines, the intention of the Central Government (CG) looks clear on implementation of Goods and Service Tax (GST) in the Country. However, on close reading of Clause 18 the Constitution (122nd Amendment) Bill, 2014 and its impact on the general business and commerce in the Country, it appears that the things are absolutely different than what is being projected before the public at large on GST front.

As per Clause 18 of the Constitution (122nd Amendment) Bill, 2014 (“Constitutional Amendment Bill”) – as passed by the Lok Sabha in May 2015 and referred to the Select Committee by the Rajya Sabha – an additional tax on supply of goods, not exceeding 1% in the course of inter-State trade or commerce shall be levied and collected by the Government of India for a period of two years or such other period as the Goods and Services Tax Council may recommend, and such tax shall be assigned to the States from where the supply originates. (Herein after referred to as “1% Additional Tax”)

The purpose of 1% Additional Tax is to compensate the manufacturing States for loss of revenue while moving to GST. The 1% Additional Tax shall not be allowed as Input Tax Credit and therefore it would bring cascading and distortionary effect in the value chain of business cycle in the Country. As we know, the basic purpose of GST is to make ‘India’ as one State, where inter-state movement of goods is very common and in that situation, 1% Additional Tax would increase unwanted cost and thereby, it would defeat the very purpose of having GST in the Country.

Other arguments against the 1% Additional Tax is outlined as under –

  1. Without getting in to the politics, if one can recall, the GST Bill (year 2012 version) as placed before the Lok Sabha by UPA-II Government did not have any such provision of additional, non-creditable Tax. How come the CG of the day proposes to levy 1% Additional Tax without consulting the stakeholders?
  2. Surprisingly, there is no mention in the Constitutional Amendment Bill, after which Article the Clause 18 on 1% Additional Tax is proposed to be inserted. If you read Constitutional Amendment Bill, it is mentioned for example, Article 246A is to be inserted after Article 246 of the Constitution. However, it is not mentioned at which place the Clause 18 on 1% Additional Tax is proposed to be inserted in the Constitution of India. Can the CG collect a tax without giving reference to the Constitution in India?
  3. 1% Additional Tax is a separate tax and therefore it would require separate legislation. As per Sub-clause (4) of Clause 18 of the Constitutional Amendment Bill, Parliament may, by law, formulate the principles for determining the place of origin from where supply of goods take place in the course of inter-State trade or commerce. Hence the CG would pass another Bill for 1% Additional Tax in the Parliament.
  4. GST will be a destination based tax. In total contrast to this, 1% Additional Tax will be origin based tax. How can both – destination based and origin based tax be levied on single transaction?
  5. Chief Economic Advisor Arvind Subramanian while giving an interim update on the economy on the occasion of NDA’s first anniversary said on records that “GST is a destination-based tax. This (1% additional tax) is an origin-based tax. So it sits very uncomfortably with the fundamental principle of GST. Second, the irony would be that sort of a provision would favour international trade over intra-national trade because every time a product crosses the border, it would have to pay extra non-vatable tax,”
  6. 1% Additional Tax on inter-State movement of goods would make import cheaper. In that context, how “Make In India” mission of the CG would be justified. Further, 1% Additional Tax would add compliance cost of business community and therefore it will also badly hit ‘Ease of doing business’ in India.
  7. It is mentioned that in the Constitutional Amendment Bill that 1% Additional Tax would be levied for two years or such other period as the Goods and Services Tax Council may recommend. There was also a debate in the EC meeting to increase the time period (of two years) for additional 1% Additional Tax, if two third of the members agrees so. In short, in our Country, a tax once imposed by the Government generally does not withdraw.
  8. The Select Committee on GST has submitted its report to Rajya Sabha on 22nd July, 2015. As per the news available, the Select Committee has considered in its reports that CG should compensate States for loss of revenue (due to GST) for five years instead of 100% compensation for first three years with tapering for fourth and fifth year as mentioned in the Constitutional Amendment Bill. If the Rajya Sabha passes the Constitutional Amendment Bill accepting the suggestions of the Select Committee on five full years compensation by the CG, then where is the need for 1% Additional Tax and thereby putting the trade, industry and customer under economic distress?
  9. To track origin based 1% Additional Tax along with destination based GST (i.e. two-way transaction), the CG would require a complex and glitch-free Information Technology (IT) system fully operational at all States on a real time basis. We all know CG with the help of Empowered Committee of State Finance Ministers (EC) has already formed Goods and Services Tax Network (GSTN) to take care of IT support of GST for front end system for Trade and Industry and back end system for all Government agencies. On this front, readers may note that the Finance Minister in mid-June 2015 has formed a Steering Committee to monitor the progress of IT preparedness of GSTN. The Committee is expected to give its report within two months. We have to watch the reports the Steering Committee on GSTN covering how 1% Additional Tax would be tracked.

While analyzing the above mentioned points it is not clear how the Statements of the Finance Minister that “GST will end cobweb of various taxes” or “….…(GST) is going to create India into a one unified market and (promote) free flow of goods and services, facilitate free trade…..” would be achieved?

Considering the far reaching negative economic impact, we hope the CG would re-consider its decision to levy 1% Additional Tax in the best the interest of the trade, business and ultimate customers in the Country.

* The views expressed are personal.

(Author: DS Mahajani, M.Com, ACS, ACMA. He can be reached at DSMAHAJANI@YAHOO.COM.)

Also Read- Challenges for Success of Goods and Service Tax (GST) In India 

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