In the first week after the roll-out of the goods and services tax (GST), Maharashtra and Tamil Nadu have tweaked local taxes other than those needed to be part of GST legally. This, many analysts fear, could trigger a trend that could undermine the objectives of the new tax. The GST, which subsumes most major indirect taxes, is designed to reduce cascading of taxes that jacks up costs to businesses. Prevalence of input taxes that cannot be offset by the downstream industries is against the GST’s basic tenet. While Maharashtra has raised the one-time registration tax on private two-and four-wheelers by 2%, city corporations in Tamil Nadu have imposed 30% entertainment tax over and above the GST rate levied on cinemas. “In principle, the increase in local taxes is a regressive step and does undermine the overall objective of GST, but there is nothing unconstitutional about it as GST allows states freedom over certain local body levies,” Uday Pimprikar, tax partner at EY, said. He added that Tamil Nadu’s decision to impose entertainment tax was particularly appaling as it penalises one segment of the business community.
Although many local taxes like octroi or entry tax, VAT and luxury, etc have been subsumed in GST, the law permits the states to collect revenue through entertainment tax, vehicle registration tax and stamp duty on purchase of property among others. However, the states’ much reduced power over taxation will prevent distortion of GST unlike the case under the earlier state VAT system. In the past, several states tweaked their laws to restrict flow of input tax credit and impose levies on inter-state transfer of stock under VAT.
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For instance, Punjab, in December 2013, introduced a system of levy only on the first point of sale for a large variety of items — from electronic goods and packaged foods to mineral water and medicines — at substantially higher rates of 7-25% (as against the weighted average of about 12% in case of other items). This meant the tax is paid at either the manufacturer’s or first importer’s stage and an absence of tax on the value added downstream, including at wholesale and retail points.
Tax experts say that with the GST Council being the primary arbiter for change in GST rules and tax rates, the states’ ability to ride roughshod above tax policies has drastically reduced.
The imposition of local body taxes will continue for sometime before the trend stagnates but it is unlikely to dent the objective of the new regime, government official said on the condition of anonymity. “The states have enjoyed autonomy over taxation since independence, which has now been stripped off with the implementation of GST. The administrations will take time to adjust to the new reality,” the official said.