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Answer to the Questions About the GST Compensation Cess

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A prologue to this article would be to read this one, by the Hindu – 

The article’s summation is the questioning of the validity of the GST Compensation Cess enacted under the GST (Compensation to States) Act, 2017. 

I rarely defend the government. Infact, I rarely defend any government in the history of India. Few have been amazing all of the time (looking at you Lal Bahadur Shashtri’s premature administration) and fewer, have been revolutionary (side glance at P.V. Narasimha Rao’s New Industrial Policy of 1991), however, there are times when governments do good and to oppose them just for the sake of opposing or to bring in convoluted  legal arguments to obfuscate the general public is bad, as has happened here. 

This article questions the constitutional and legal validity of the GST Compensation Cess.

Firstly, it mentions, after defining what a cess is, that the funds after having been transferred to the states can be used for any purpose, including, they mention, of funding a state’s fiscal deficit. This is where I had to intervene and inform the authors that entire purpose of the GST Compensation Cess was to provide manufacturing states compensation for changes from the old system. In the old CENVAT system, consumer states were the ones who would procure losses because the old system was a origin-based taxation system. The GST is a destination-based system. The difference and the logic as to why the compensation cess was needed is, hopefully, now clear to the authors. Obviously, the statement that the old system was imperfect would be an understatement, but, to change the 65 year+ system would mean that since the manufacturing states would now bear losses, they would be needed to be compensated for that. Furthermore, the argument presented about the cess being used for any purpose such as the adjustment fiscal deficit is farcical because that, is the entire point of the cess. The state is free to use that cess to compensate for its losses. Reducing the state’s fiscal deficit is the exact purpose of the cess as the fiscal deficit indicates a state’s losses, financed through borrowing, a lot of which is happening because of the new GST reform. Compensating states is being done due to the Centre impeding on a state’s administrative territory of taxation by subsuming the taxes under GST. It is only because of the Centre’s implementation of the GST which disrupted the old system that brought on a need to compensate the fiscal deficit of a state. The cess has completed its earmarked purpose when the Centre gives it to the states for loss of tax revenue. The state may fund it for any scheme or it may adjust its balance sheet. The end result – that the state’s account is credited due to revenue losses is done. The purpose of the cess is done which is why it is constitutionally valid. 

The article also argues for the relation between the contributor and beneficiary of a cess. By that logic, a lot of cesses would be unconstitutional including the Krishi Kalyan Cess as there is rarely, if ever, a direct relation people who pay the cess and the beneficiaries of the cess.  Everyone pays indirect taxes. Unless you are talking about a specific cess on an item such as a clean environment cess imposed on cars passing by tolls, then that produces a relationship i.e. polluters who contribute to the emission of CO2 in the environment and beneficiaries which would be the general public affected by this. However, is it possible to produce a relationship between people who pay for farmer’s welfare and the farmers? The criteria for a relationship is not defined so is the basis for this relationship – ‘people are of good conscience and want farmers welfare’, then, would people not want the welfare of those states, many of whom they might be living in, who are affected by a new system of taxation? Could the Education Cess be declared invalid because there it was imposed on all individuals and companies?

What is the relationship of Zomato with government higher education programs? 

It also questions the legislative competence by invoking the 2014 bill which was withdrawn, by saying, that it had a specific provision of 1% inter-state tax. There was no such provision in the bill that was actually passed. Only that the GST council’s recommendations would mean that Parliament shall provide for the compensation for states for 5 years. They invoke Article 279A (4)(f) by mentioning that the only reason special rates can be raised is for natural disasters. Reproduced below – 

(4) (f) any special rate or rates for a specified period, to raise additional
resources during any natural calamity or disaster;

The only problem is, they forget to look up.

Article 279A (4) (a) reproduced below says – 

(4) (a) the taxes, cesses and surcharges levied by the Union, the States and
the local bodies which may be subsumed in the goods and services tax;

A special rate and a cess has a difference in the Act. A special rate can be raised only for natural calamities. A cess has the same definition under Article 270 and can be subsumed under the GST or imposed on top of it, like a normal cess. The key word in subsection (a) being “may be”. Not all cesses are subsumed under the GST, nor should they, be as the point of a cess is to quickly fund a specific purpose, not a single purpose, and on top of the existing tax. 

Nothing malicious is going on here. No one is bypassing the legislature. 

Now, that that is over. I have to agree with the authors on the implementation of the cess. The arbitrary nature of this cess on things like lemonade and coal does not compute to be sinful goods or luxury goods. It needs to be curtailed. 

The government needs to be questioned on the basis for implementing the compensation cess, however, the compensation cess itself is perfectly fine, is statutorily backed and certainly does not cause questions to be raised on its validity. It is articles like these which raise questions and deflect the narrative from where the debate on GST needs to go. 




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