GST Compensation Cess

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The 122nd Constitution Amendment Bill initially proposed a 1% additional tax to compensate States but this was later withdrawn.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