The tax on Tamil Nadu theatres proves businesses have many more hiccups to face

In the first week of the Goods and Services Tax, the myth of 'one nation, one tax' has been busted. Movie theatres across Tamil Nadu have pulled down their shutter in protest against the state government's decision to levy 30% entertainment tax over and above the 28% GST.

Double taxation

The additional 30% tax burden is the result of a loophole that was left open by the Centre during its negotiation with the state governments. This loophole allows local bodies or municipalities within every state to levy taxes to meet their financial requirements.

There are approximately 4,000 municipalities in India, and they have been given rights to levy their own taxes in order to meet a shortfall in their revenues.

PwC Partner (Indirect Tax) Anita Rastogi says, “In the empowered committee of state finance ministers, the issue of subsuming all local body taxes was raised. However, the states did not agree with the Centre and in order to get the states on board, the Centre agreed to allow local bodies to have the right to levy taxes as per the existing rules of state-level taxes.”

Before the negotiation for GST that includes Central GST and integrated state GST, the states were worried about the shortfall in their revenues with the enactment of the a centralised tax regime in India.

Even though the central government had promised states to compensate for any shortfall in revenue for the next 5 years, the states wanted to have a clause that could be used to increase their revenues irrespective of what the Centre offered them as a share of their revenue from the GST.

This has lead to states such as Maharashtra, Tamil Nadu, Madhya Pradesh and Gujarat to negotiate the powers of levying taxes over and above the CGST and SGST to boost their revenues.

What are the other taxes the can be levied outside GST?

The state governments can use eight more type of taxes to increase their revenues. Those taxes fall under the following categories:

1) Electricity cess
2) Stamp duty
3) Entertainment tax
4) Entry fee (on commercial vehicles)
5) Road tax
6) Toll tax
7) Extra excise duty on tobacco products
8) Property tax

Additional issues

Even though GST as a concept is meant to make taxation simple and easy to understand, but in India, due to various pulls and pressure between the Centre and the states, it has taken a complex form. This, according to its critics, will add to the already existing problems in the Indian taxation structure.

The Arvind Subramanian panel of revenue neutral GST in December 2015 had recommended a three-tier rate structure in which some essential goods were to be taxed at 12%; the demerit goods such as luxury cars, aerated beverages, pan masala and tobacco products were to be taxed at 40%, while all remaining goods were proposed to be taxed at 17-18%.

For services, the Subramanian panel had proposed a standard rate of 17-18%.

But the GST council passed an eight-rate structure under GST, apart from allowing local bodies to levy their own set of taxes.

Miffed with a complex structure of the GST, NITI Aayog Member Bibek Debroy recently said that the multiple rates of GST emanate from the "desire to tax items" which were perceived to be luxury through the means of indirect tax.

"Please understand these multiple rates are coming from... this desire to drive other ends through indirect tax policy and other concerns of the states," IANS quoted Debroy.

"And therefore, you have plenty of exemptions, plenty of items that are outside the GST net and multiple rates," added Debroy.

Given the many loopholes left in the GST, the businesses must prepare themselves for more hiccups as and when the states feel the need to increase their revenues by levying additional taxes.