As the Goods and Services Tax (GST) rolls out across the country, the prospect of one state — Jammu & Kashmir — staying out from the ‘One Nation, One Tax’ theme of the indirect tax regime raises the possibility of double taxation of inter-state transaction of goods going to the state since two levies — the Integrated GST (IGST) and State GST (SGST) of the originating state — will be imposed on all supplies to J&K, alongside local levies such as value added tax (VAT) and sales tax.
The ramification could be more pronounced as traders will not be able to avail input tax credit for supplies of taxable goods and services from other states to J&K. The state government could also take a hit as it will be ineligible for compensation for any potential losses as the GST (Compensation to States) Act, 2017 specifically provides for any compensation to kick in from the transition date, which implies the date on which the SGST Act comes into force in the state concerned.
While there was expectation that J&K could bring in an ordinance on Friday, on the lines of what West Bengal and Kerala had done earlier, J&K Finance Minister Haseeb Drabu, when contacted by The Indian Express, said they were trying to bring in a modified extension of the constitutional amendment, hopefully by July 5.
J&K not joining the GST could have ramifications for the Centre too, which will lose powers to levy excise duty in the state as the Constitution (One Hundred and First Amendment) Act, 2016 comes into effect.
Tax analysts said that there is ambiguity regarding the applicability of GST to J&K. “There is a lot of ambiguity regarding GST’s applicability in J&K. Government should come up with some clarification on the issue,” Pratik Jain, partner and national leader, indirect tax, PwC said.
Industry sources said that suppliers of goods, especially fast moving consumer goods, have increased their supplies to J&K over the last few weeks, so that they can go slow after July 1 amid the ambiguity.
Finance Minister Arun Jaitley, speaking at the Aaj Tak GST Conclave on Friday, said that while J&K’s consumers of products from outside would pay tax twice in the absence of GST, goods sent out of the state would similarly attract double levy, making everything more expensive. Besides, J&K would not get the benefit of the Centre’s compensation to states on account of the loss in revenue incurred by implementing GST. “Because of such a situation arising, we could have a scenario where Jammu will want to come into the GST regime while Kashmir will not,” he said.
Primarily being a consuming state, J&K is expected to benefit from the rollout of GST as it is a destination-based tax. According to a 2016 report on ‘Impact of GST on Jammu & Kashmir Taxation System’, prepared by the Institute of Chartered Accountants of India along with J&K government officials, the implementation of GST in J&K is expected to provide a gain of Rs 1,580 crore to the state as overall costs are likely to reduce and the state is likely to gain with GST on services.
Unlike other states, which were required to pass only State GST (SGST) Act in their respective assemblies, J&K needs to enforce both Central GST (CGST) and SGST Act due to the special status for the state under Article 370 of the Constitution. The central government had made an exception for J&K in the CGST Act in March this year unlike the draft version of the law where there was no such exception. The IGST Act also makes an exception for J&K.
On Monday, Jaitley had written to J&K Chief Minister Mehbooba Mufti, urging her to ensure the rollout of GST in the state from July 1. Citing price rise and “adverse impact” to local industry in J&K in case of deferment of the rollout, Jaitley had asked her to send the concurrence of the state on the the GST’s Constitution (One Hundred and First Amendment) Act, 2016, as the President may specify by order.
As per Article 370 of the Constitution, the power of Parliament to legislate for J&K is restricted to defence, external affairs, communication and central elections. However, the President may, with the concurrence of the state government, extend other central laws to the state and apply amendments made in the Constitution of India to J&K.
At a consultative meeting held Thursday, the ruling PDP-BJP government failed to evolve a consensus on the GST rollout in the state. The Opposition voiced concerns regarding losing fiscal autonomy of the state if the central law is extended to the state without protection of J&K’s own taxation powers.