Vijaya Mulay, the director of Doordarshan's animated short film 'Ek Chidiya Anek Chidiya' passed away recently. Mulay's film, that millions of Indians have grown up watching, carries a beautiful message about unity in diversity.
Almost concurrently, although diverse with the Mulay's demise, the country witnessed another development in the form of introduction of Flood Cess by the Government of Kerala on the taxable supply of Goods and Services Tax ('GST') within the State (i.e., intra-state). The introduction of Cess triggered a debate whether the GST that is presumably 'One Nation One Tax' is indeed 'Ek' tax or 'Anek' Tax?
The core apprehension in such debates is - are the GST rates sacrosanct and apply uniformly across the country or is it permissible for State Governments to deviate from the all-India GST rates? Well, before attempting to divulge on this aspect one should be mindful of the fact that the introduction of Kerala Flood Cess is not the first instance of altering the effective rate of GST applicable on the supplies made within a State (i.e., intra-State supplies). Exemption of State GST ('SGST') component on the movie 'Uri: The Surgical Strike' by the Uttar Pradesh Government is yet another example of such deviation. Although the latter was the case of granting a tax exemption, still it caused a disparity in terms of effective GST rate applicable on the sale of the movie tickets in Uttar Pradesh vis-à-vis other States.
This divergence, though daunts the theme of 'One Nation One Tax', is not unlawful. Under the Constitutional framework of GST, there is no machinery to mandate State Governments to levy SGST equal to the Central GST rates ('CGST rates'). To put it differently, in the Constitutional scheme of GST, each State is free to decide the respective SGST component for intra-State supplies. The jurisprudence behind such structure is simple - autonomous powers of the States to levy and collect taxes should be protected in order to maintain the federal form of the Constitution.
'Is GST going to be like the Value Added Tax ('VAT'), where States started with three base rates and gradually deviated from them with the passage of time?', was the apt question addressed to me when I explained the Constitutional framework to the participants in one of the GST events meant for Chartered Accountants.
'That is unlikely, primarily due to the design and inter-operability of the GST laws', I replied and then explained the reasons:
- The rate of Integrated GST ('IGST') applicable on inter-State supplies of goods is governed by the IGST Act that is formulated by the Parliament and States cannot alter the IGST rates. Consequently, any Cess could only be imposed on intra-state supplies. In other words, even after the introduction of the Kerala Flood Cess, the supplies made from other States to Kerala or visa-versa cannot be subject to this Cess (including supplies to unregistered persons located outside the State);
- This the design of GST laws is conceptually much different form the Central Sales Tax, as in case of the latter the rates on inter-State supplies made to unregistered buyers were governed by the VAT rates applicable in the supplier State (instead of common IGST rates) and in any event the tax charged was non-creditable;
- As a corollary to this, in order to legitimately escape from the levy of Cess or any other increase in the SGST rate by any State, the businesses based in such State would start procuring goods from other States (i.e., through inter-state supplies) without attracting the Cess liability (i.e., upon payment of IGST for which input tax credit can be availed);
- Given this lawful model for tax arbitrage, States would be precluded from imposing any Cess or increasing their SGST rates. Any enhancement in the effective State GST rates would discourage procurements from within the State and, thus, adversely impact the businesses based in this State.
To summarize, the impact of introduction of any Cess or enhancement in State GST levy, in the longer run, would mainly be confined to low value B2C supplies[1]. The loss of local business would act as a push factor for the State to realign their rates with the national rates.
Thus, the inclusive idea of nationally integrated indirect tax laws - Ek, Anek Aur Ekta (One, Many and Unity) is addressed through IGST - a centripetal force that discourages 'anek' and aims at 'ek' GST.
[1] Even the Kerala Flood Cess is proposed to be levied on the intra-State supplies to unregistered persons
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