What is the issue?
GST Compensation Cess intended to compensate the losses of states for the first 5 years of GST doesn’t stand on strong constitutional ground.
What is a Cess?
- A cess is a tax on tax, levied by the government for a specific purpose.
- The contributor and beneficiary of a cess must be relatable.
- Under Article 270 of the Constitution, proceeds of a cess can be retained exclusively by the Union and need not be shared with States.
- The objective is to ensure that expenditure goes for that specific purpose.
What is GST compensation cess?
- As part of the GST reforms, this Cess has been introduced through the GST (Compensation to States) Act, 2017.
- It is levied on inter- and intra-State supply of notified goods such as aerated drinks, coal, tobacco, automobiles for 5 years.
- The proceeds will be distributed to loss-incurring States on the basis of a prescribed formula as compensation.
What are the shortcomings?
- Once the money is transferred to State governments, it can be used to fund any scheme.
- It may even be used to fill the government’s fiscal deficit.
- Further, there is no relation between the persons contributing to the cess and the recipients, the State governments.
- The goods earmarked for the cess, such as aerated drinks, coal, tobacco, automobiles and “other supplies”, do not form a distinct category deserving the liability to pay this cess.
- The sin goods argument also fails as the luxury goods & jewellery are not covered.
- The term “other supplies” leaves much to the discretion of the government.
Is it constitutionally valid?
- The 122nd Constitution Amendment Bill initially proposed a 1% additional tax to compensate States but this was later withdrawn.
- Article 271 has been amended to state that an additional tax/surcharge cannot be imposed over and above the GST rates.
- The GST Council’s power to recommend a special rate is confined to raising resources only during any natural calamity or disaster.
- So this cess cannot be justified under such power either.
Source: The Hindu
