Additional Tax upto 1% on Inter State Supply of goods

  • Additional tax not exceeding 1% on inter-state transfer of goods

    Goods and Service Tax is a comprehensive tax on supply of goods and services or both in India to replace number of indirect taxes at the central level and the state level.  There is a levy of not exceeding 1% additional levy on interstate trade or commerce.  This additional levy is not there in the first constitutional amendment bill introduced by the UPA government as it has lapsed before taking up for discussions. After the NDA came to power, the things started moving and as part of confidence building measure, the FM has released part of the funds for compensating the loss of revenue on account of reduction of central sales tax which was pending for years. Also to bring the states on board has accepted the proposal of having this new tax.

    In the new constitutional amendment bill “THE CONSTITUTION (ONE HUNDRED AND TWENTY-SECOND AMENDMENT) BILL, 2014” on GST introduced by the current government has added the clause under point 18


    18. (1) An additional tax on supply of goods, not exceeding one per cent. in the course of inter-State trade or commerce shall, notwithstanding anything contained in clause (1) of article 269A, be levied and collected by the Government of India for a period of two years or such other period as the Goods and Services Tax Council may recommend, and such tax shall be assigned to the States in the manner provided in clause (2).

    (2) The net proceeds of additional tax on supply of goods in any financial year, except the proceeds attributable to the Union territories, shall not form part of the Consolidated Fund of India and be deemed to have been assigned to the States from where the supply originates.

    (3) The Government of India may, where it considers necessary in the public interest, exempt such goods from the levy of tax under clause (1).

    (4) Parliament may, by law, formulate the principles for determining the place of origin from where supply of goods take place in the course of inter-State trade or commerce.

     Un Quote

     First lets we go into the jurisprudence for the levy of charging additional tax not exceeding 1% by state of origin in the interstate transactions. Under GST, the taxes will be based on destination principle unlike the current principle of origin based. In the current mechanism the state from where the good are shipped / sells will get the CST amount from the center. Now under GST, the states which purchases / consumes the goods will get the benefit of Integrated Goods and Service Tax (IGST). Many states have expressed fear of losing revenue on moving to new principle of taxation as these states where enjoying currently the central sales tax levied on such transactions. In order to bring all the manufacturing states on board for early adoption of GST in India, the Finance Minister Shir Arun Jaitely has agreed to this additional tax proposed by the Gujarat and Maharashtra, even though this is against the principle of GST.

     But in the media lot of fears have been expressed by eminent persons for this additional tax. They have concluded and expressed that during the inter-state transfer of goods, if the goods move through four different states, then this levy of up to 1% is to be paid four times. Looks like this is again an interpretation issue  unlike any tax laws in India. This fear or understanding is totally baseless as the second point clearly states that the originating states gets the additional levy of 1% and also it clearly states that the principles for determining on the place of origin will be announced in the due course. This will be true only in the cases where the manufacturer does not have a clear plan / strategy for storage of goods in different states and keeps moving from one state to another based on demand for the goods. If the goods are moved four / five times, this additional levy of 1% is applicable. But again we need to wait for the exact rules before we conclude something and as professional we should avoid spreading wrong information.

    The same is clearly explained in the Statement of Objects and Reasons of “THE CONSTITUTION (ONE HUNDRED AND TWENTY-SECOND AMENDMENT) BILL, 2014

     (e) levy of an additional tax on supply of goods, not exceeding one per cent  in the course of inter-State trade or commerce to be collected by the Government of India for a period of two years, and assigned to the States from where the supply originates;

    For the time being we can conclude that this additional levy will not be charged through all the states when goods move different states in the inter-state sales.

    With this clause only the Constitutional Amendment bill was passed in Loksabha and when the same was introduced in Rajya Sabha, it was referred to the Select Committee. Based on the feedback the Select Committee has recommended the additional tax to be removed for the following reasons

  • Center will be compensating the states 100% for the first five years on revenue loss for states on account of implementing GST and this clause has been incorporated in the Bill bases on the Select Committees recommendations.
  • It would be cascading effect as the word from manufacturing states is not mentioned during inter-state supply of goods.
To overcome this fear, the Central Government has added the clause “Supply: “All forms of supply made for a consideration”.  This means that additional tax upto 1% will not be applicable in case of branch / stock transfers where consideration is not received as goods are being transported from the same entity and received in the same entity.
The select committee report can be accessed from here
Ideally as the Center has agreed to compensate the sates for the revenue loss for the first five years in the bill itself, additional tax can be dropped but if we see from the Central Government’s view it does not want to burden it self with the additional cash flows.
There should not be any fears on this for the following reasons
  • it is applicable only on supply of goods and not services
  • it is applicable only in case where consideration is received
  • it is applicable only for first two years

Any views or opinions represented in this section are personal and belong solely to the author and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.

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