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Goods and Service Tax (GST) has been a topic of debate in the recent past. With the NDA government looking firm to bring in the GST, the members of Rajya Sabha still have a number of objections to raise, and for their very reasons. Finance Minister Arun Jaitley has been strongly contending that the implementation of GST would remove cascading effect of taxes thereby making way for a business-friendly economy. However, on close observation of Clause 18 of the Constitution (122nd Amendment) Bill, it appears that things are quite different than what is being projected. This clause seeks to impose the most talked 1% additional levy by the Centre on supply of goods in course of inter-state trade or commerce. In this article, an effort is being made to analyze this levy and criticism faced by it.

What is 1% additional levy?

The provisions relating to 1% additional levy have been proposed in clause 18 of the Constitution (122nd Amendment) Bill (popularly known as GST bill). This clause is being divided into four sub-clauses. These clauses are explained as follows:-

The sub-clause (1) to the clause 18 says:-

“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).”

From analysis of above sub-clause 1, features of this levy can be listed as follows:-

•It is an additional tax and will be levied over and above the normal GST rate as may be prescribed.

• It shall be levied in course of inter-state trade of commerce.

• Its rate will not exceed 1%.

• It will be levied and collected by Centre for a period of two years.

• The period of two year can be revised by GST Council.

• The proceeds from this levy will be assigned to the State in which the supply of goods originates.

Further, provisions contained in sub-clause 2 to 4 to the clause 18 are explained as follows:-

Sub- clause no.

Provision contained


  • Collection from this levy shall not form part of consolidated fund of India and will be deemed to be assigned to the State from where the supply originates.
  • Only the proceeds attributable to Union territories shall be credited to Consolidated Fund.


Centre may prescribe list of goods on which this levy will not be applicable.


The law related to principles for determining the place of origin (from where the supply of goods takes place) shall be formulated by Parliament.

Need of such levy:-

Since GST is a destination based tax, it is said that initially the manufacturing states or the states where the production of goods is done; will suffer loss. The purpose of this 1% additional tax is to compensate the manufacturing states, i.e., the states from where the supply of goods takes place. However, it is expected that GST will lead to increase in revenues of all the States, thus, the manufacturing states will also gain in long run. Due to this reason, this levy has been proposed for a period of two years only. However, end decision has been kept safe in the hands of GST council. This levy can be said to be a serious effort made by the Centre to convince the States to agree upon the introduction of GST. It is also in line with the recommendations made by the Empowered Committee in their various meetings for the protection of the revenues of the manufacturing States. It is worth noting here that Clause 18 in itself does not make any distinction of a “manufacturing state” and this tax shall be levied by all States who send their produce outside the State.

1% Levy: CST in new name?

It has been stated by our Finance Minister that the input tax credit of this levy will not be allowed. Thus, this is against the very basic objective of GST. Even the main feature of GST as popularized by the ruling party is that there will be no cascading effect.  When the Credit of this levy will not be allowed where will it go? Definitely, it will be included in the cost of the goods that will further be subject to tax. Thus, cascading effect will be there. Also, it is mentioned that this 1% Additional tax shall be levied for a period of two years or such other period as the Goods and Services Tax Council may recommend. By these features, this levy seems to be replica of Central Sales Tax (CST) levied currently. Also, this levy has most of the inherent features of CST. At the time of introduction of VAT, CST was levied and it was said that it will be reduced year by year and ultimately it will be abolished. This promise was kept in the initial years and rate of CST was reduced from 4% to 3% and from 3% to 2% respectively. However, there was no reduction thereafter and still after around 9 years of implementation of VAT, CST could not be abolished as initially promised by the Government. Thus, the past indicates how far has the government withdrawn any tax after imposing it once? One can never be so sure as to if the duty shall last for two years or twenty!

Against the spirit of GST which says “no cascading effect here”:-

GST is a destination based tax and this 1% additional duty is an origin based tax. How can both- the destination based as well as the origin based tax be levied on a single transaction? Also, ironically, it would favour international trade over inter-state trade. As stated earlier, clause 18 in itself does not make any distinction of a “manufacturing state” and this tax shall be levied by all States who send their produce outside the State. This provision in itself is the originator of cascading effect. Let us consider an example- Suppose a dealer in Maharashtra purchases cloth from Delhi and sends it to Punjab for tailoring. The finished goods are sent back to Delhi. Such finished goods are then consigned to Maharashtra for sale. In this way, by the time they reach Maharashtra, they would be laden with an additional tax burden of 3-4%, being 1% for each state. It would be more feasible for the dealer in Maharashtra to import such goods rather than getting them from Delhi.

On one hand, the government has been laying emphasis on “Make in India” campaign, wherein, special efforts are being made to ensure the free flow of goods and services in the economy. On the other, additional duty of such kind is being levied. It is beyond our understanding- how such additional duty shall contribute to the free flow of goods and services?

Rate of GST is already high, why 1% extra with no credit facility?

Scope of GST would be much wider than any other indirect tax structure. Thus, a no. of goods and services which are not taxable under present structure would also come under the ambit of tax. Also, the rate of GST is already proposed to be around 18-22% which is quite high. A service provider, who currently pays tax @14%, would be liable to pay the tax at a higher rate. The same goes with trader of goods as well. Adding to this, the rate of GST is going to be a single consolidated rate for both goods as well as services. In this manner, a trader of goods has to pay tax for service component also and service provider has to pay tax for goods also. Under such circumstances, when the tax imposition is already going to be higher than the existing situation due to increased rate and wider scope, where does the question arise regarding loss of revenue?

Compensation of losses already agreed, why provision for this levy:-

There is provision in clause 19 of the GST bill wherein the Central Government will compensate the loss occurring to the states due to implementation of GST for five years. When there is already a provision of compensation of loss occurring to the states, then where is the need for additional 1% duty which is totally against the basic principles of GST. Also, the provision of compensation of loss and this 1% additional levy is basically drafted for loss making states during transitional period of GST. When we talk of clause 19, it would result in no profit no loss situation since whatever the loss state is making will be compensated by Centre. However, when it comes to 1% additional levy, though the states making losses will have some income from this tax but the states already making profit or under no profit no loss situation will definitely gain extra. This seems to be against the basic principles of introducing this levy as the states gaining will gain more and that too with the cost of other states which shall have to bear the cost of this 1% additional levy.

While parting:-

Going by the progressions, it wouldn’t be wrong to state that Modi Sarkar has actually lost the basic sight of GST. What was depicted to be the most simple taxation system is now being turned into a cobweb of complications. They need to practise what they preach. Not just the people, even the bureaucratic system of our nation is not ready to accept such complicated taxation system.

To conclude, it can be said that the GST era is just round the corner. The financial Godfathers of our nation must think about the disastrous impacts which the additional tax can create on our economy. Levying an additional tax can never be a business catalyst. These are certainly not the “Ache Din” that India was waiting for. The need of the hour is to dismantle this additional duty and make way for an economy which is best suited for trade, commerce and entrepreneurs. And only then, shall we be able to convert the dream of “Start-up India, Stand-up India” into a reality!!!

An article by:
CA. Pradeep Jain
CA. Preeti Parihar
Sharad Bang


Published by

Pradeep Jain
(Chartered Accountant)
Category Service Tax   Report

2 Likes   39 Shares   10653 Views


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