The basic tenet of the Goods and Services Tax of subsuming a range of central and state taxes and cesses into one may be under threat from states. Maharashtra has slapped an additional 2 per cent vehicle registration tax above GST on private two and four wheelers, depriving consumers in the state of benefits accruing from the lowered prices. Elsewhere in Tamil Nadu, the film industry came to a grinding halt when the fraternity went on a strike over the state government’s decision to levy an additional 30 per cent local body tax over and above the GST on theatres.
The developments lead one to question whether the rollout of the GST has indeed led to the creation of a unified market as it intended to. And if not, why? Sadly, one does not need to venture too far to find the reason behind this anomaly. The answer lies in the decisions of the GST Council that empower state governments to hedge losses in revenue through imposition of additional levies on businesses and consumers. But then, one wonders what all the hullabaloo over the concept of the Centre compensating states for revenue losses was all about.
Sample these. On Tuesday, the Maharashtra cabinet decided to raise the one-time registration fee on private two-wheel and four-wheel vehicles by two percentage points, for new ones registered in the state. This is to compensate for a combined revenue loss of Rs 600-700 crore annually that it will lose on local body taxes and octroi after GST implementation. The increase is across vehicle categories. The annual loss due to the discontinuation of octroi and LBT on vehicles in Maharashtra is pegged at around Rs 700 crore under the GST regime, according to reports. With the new vehicle registration tax, the state hopes to mop up Rs 750 crore.
Revenue through octroi, the Centre said, was huge for Maharashtra and so were the losses on account of octroi being subsumed by the GST. Union Revenue Secretary Hasmukh Adhia said states were well within their rights to increase vehicle registration fees, entertainment tax and stamp duty. What was barred was any entry tax on goods movement. "How proper or improper it is (states increasing fees and taxes) is not for the Centre to judge," said Adhia.
Tamil Nadu has announced it will levy a 30 per cent local body entertainment tax over and above the GST rate of 28 per cent on theatres. While theatres withdrew their four-day strike today, ticket rates in the state with a government-imposed price cap of Rs 120 went up by Rs 33.60. The double taxation amounting to 58 per cent, said theatre owners, would make their businesses unfeasible forcing them to shut down. Moreover, they believe that the unilateral move will deal a severe blow to their business and may even ‘kill Tamil cinema’.
While the entertainment tax is part of the GST with two specific rates – 18 and 28 per cent – there is a provision which says “local bodies are free to levy their charges and there is no cap on the quantum of additional levy. "The Constitution gives powers to state governments to impose additional tax in certain categories," Adhia said. Since local body taxes will be subsumed under GST, states will be free to impose an additional tax over 28 per cent on entertainment to fund state local bodies, the Council had decided. Notably, cinema is the only category where such a carving has been created by way of law.
Now, while fixing multiple rates, the all-powerful GST Council had floated the GST Compensation Law to compensate states for any tax revenue loss on account of GST enforcement, for a period of 5 years. Why then, one wonders, did the Centre make provisions for states to levy additional taxes in the name of revenue losses. And if at all the states were to be empowered to do something contrary to the ‘One Nation One Tax’ cause the Centre has championed, why bring the compensation debate to the table in the first place?
One of the biggest sticking points in the implementation of the GST has been the issue of compensation. GST is a destination-based tax and will be detrimental to manufacturing states and benefit those who are largely consumers. So, while states like Bihar and Uttar Pradesh will benefit from the GST, states like Maharashtra, Gujarat, Tamil Nadu etc. could end up at the losing end. To deal with this issue, the 14th Finance Commission had recommended 100 per cent compensation to states for three years, followed by 75 per cent and 50 per cent in the fourth and fifth years respectively. When states refused this formula, the government had to relent on giving full compensation to states for five years. The Centre would bear around Rs 55,000 crore burden on account of compensation to states.
Still, states like Maharashtra, Madhya Pradesh, Gujarat and Rajasthan have already indicated the imposition of additional entertainment levy by local bodies (panchayats, district councils, municipalities and municipal corporations) and more states are also likely to follow suit. In fact, experts fear that with many taxes levied by bodies under the ambit of the state government left out of the GST, the practice could spread further.
A close look reveals the taxes that have been left out of the ambit of the GST. These include stamp duty, electricity cess, entertainment tax by local bodies, property tax, entry fee at municipal corporation border, road tax, toll tax and extra excise duty on tobacco products. Effectively, these are routes that states can potentially use to their advantage in days to come and could well lead to an additional burden on the consumer.
Take the case of Ola and Uber as an example. While the octroi has been removed, the entry fee at municipal corporation borders remains. What this means is that while travelling within the city will not attract any charge, crossing the municipal border – say from Delhi to Noida – will continue to draw extra charges. What’s worse is that these taxes may go up as the GST Council has fixed no cap on additional tax that a state can levy.
Once the five-year period of compensation from states is over, states will be expected to devise alternate means of hedging the losses. Going by the current trend, how they do it is anybody’s guess.