Within a week of roll out of GST on July 1 2017, Maharashtra has raised the one-time registration tax on private two-and four-wheelers by 2%. Also, city corporations in Tamil Nadu have imposed 30% entertainment tax over and above the GST rate levied on cinemas.

While the GST was expected to subsume most of the indirect taxes, yet such double taxation, though constitutionally valid, will defeat the purpose of GST, being One nation, One Tax.

This draws attention to the states that are likely to follow this trend: Manufacturing states.

Reasons for additional taxes

Various states like Maharashtra and Tamil Nadu promote manufacturing industries within the state for:

  • Job creation
  • Elimination of poverty
  • Economic prosperity of the state
  • Earning tax revenue from the established industries and from other ancillary businesses supported by them

Earlier, state VAT was charged by the states in which manufacturing took place (‘manufacturing states’) on the sale of goods, irrespective of whether the sale was made in or outside the manufacturing state.

The states that attracted manufacturing industries also had announced certain schemes:

  • Single window clearance to industries for setting up
  • Ready availability of land with road / rail connectivity and supply of water, electricity and gas
  • Skill Development University setup by government to train rural youth
  • Special incentives for industries through measures like refund of VAT, stamp duty, rebate on power tariff etc.

These schemes involve costs. Therefore, the manufacturing states incurred and are still incurring costs for setting up of manufacturing industries. However, the GST is a consumption-based tax and therefore the state in which consumption takes place (‘consuming states’) will be receiving the share of GST. This will cause losses for manufacturing states.

Bottom-line

Though, the compensation is agreed by GST council to such manufacturing states, such states are going to find ways and means to earn adequate revenues to support their state schemes. Further, in absence of biggest motive (being earning tax revenues), the schemes for manufacturing industries are likely to be unattractive to states.

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