Taxes over and above Goods and services tax
Within a week of roll out of GST on July 1 2017, Maharashtra has raised the one-time registration tax on private two-and four-wheelers by 2%. Also, city corporations in Tamil Nadu have imposed 30% entertainment tax over and above the Goods and services tax rate levied on cinemas.
While the GST was expected to subsume most of the indirect taxes, yet such double taxation, though constitutionally valid, will defeat the purpose of GST, being ‘One nation, One Tax’.
This draws attention to the states that are likely to follow this trend: Manufacturing states.
Reasons for additional taxes
Various states like Maharashtra and Tamil Nadu promote manufacturing industries within the state for:
Elimination of poverty
Economic prosperity of the state
Earning tax revenue from the established industries and from other ancillary businesses supported by them
Earlier, state VAT was charged by the states in which manufacturing took place (‘manufacturing states’) on the sale of goods, irrespective of whether the sale was made in or outside the manufacturing state.
The states that attracted manufacturing industries also had announced certain schemes:
Single window clearance to industries for setting up
Ready availability of land with road / rail connectivity and supply of water, electricity and gas
Skill Development University setup by government to train rural youth
Special incentives for industries through measures like refund of VAT, stamp duty, rebate on power tariff etc.
These schemes involve costs. Therefore, the manufacturing states incurred and are still incurring costs for setting up of manufacturing industries. However, the Goods and services tax is a consumption-based tax and therefore the state in which consumption takes place (‘consuming states’) will be receiving the share of GST. This will cause losses for manufacturing states.
Though, the compensation is agreed by Goods and services tax council to such manufacturing states, such states are going to find ways and means to earn adequate revenues to support their state schemes. Further, in absence of biggest motive (being earning tax revenues), the schemes for manufacturing industries are likely to be unattractive to states.