India: Pitfalls Of 1% Additional GST

Last Updated: 18 November 2015
Article by Shammi Kapoor and Shilpa Sharma

In the last issue of GST Café, we discussed the issues surrounding the high Revenue Neutral Rate (RNR). In this issue, we inspect the issues surrounding an additional levy of 1% on inter-state supply of goods. This issue attempts to discuss the issue relating the additional GST of 1% being proposed to be levied on inter-state supply of goods. Clause 18 of the 122nd Constitutional Amendment Bill proposes to impose an additional tax of 1% on inter-state supply of goods.

The objective of the levy of the additional GST at the rate of 1% is to compensate the States which have a developed manufacturing base such as Maharashtra, Karnataka etc. Such states consequently have a high CST collection. It is a common fear among these states that the states would lose the CST collection on the goods manufactured in such states causing revenue loss. Unlike destination based taxation regime in GST, this additional tax is envisaged to be an origin based tax wherein the proceeds would go to the State Government from where the supply originates.

As an example, goods supplied from Gujarat to Karnataka will be subject to levy of 1% additional tax as well as taxed at the GST rate (CGST plus SGST). This 1% additional tax would be collected by the Government of India, however, rather than forming part of the Consolidated Fund of India, it would be assigned to the state of Gujarat. No credit of this tax shall be available to the consignee of the goods. Further, if the same goods are supplied to another state from Karnataka, the supply would again be subject to levy of 1% additional tax which would be assigned to the state of Karnataka.

However, following concerns rise surrounding the proposal of this additional tax:

  • Unlike the present taxation regime, wherein CST is only levied on inter-state sale of goods, this additional tax is proposed to be levied on inter-state supply of goods.

    In the proposed regime, supply of goods appears to also include inter-state branch transfer of finished goods and inter-state stock transfer of inputs and semi-finished goods for job-work. Under the present regime, stock transfer of goods is zero rated subject to submission of declarations. The recent Rajya Sabha Select Committee Report has also identified this issue and has suggested supply made for consideration to be only included under the ambit of 1% additional GST.
  • This additional tax becomes a cost in transactions, since it is understood that the additional tax will not be available for set-off.

    The primary objective of GST is to create an eco-system with zero cascading effect. Since, this additional tax will not be available as a set-off, it is bound to create cascading effect. Further, since this additional tax will be levied on inter-state branch transfer, there is a possibility of multiple levy of this tax in case of multiple branch transfers of the same goods. The non-availability of the tax in any form of credit further aggravates the issue.
  • This creates the requirement to create an elementary distinction between supply of goods and provision of services.

    In the current regime, requirement to create distinction between supply of goods and services forms a pre-text to various tax disputes. As an example, the distinction would be required to be made distinct for supply of software and other intangibles. Also, the terms 'supply of goods' or 'supply' have not been defined under the Constitutional Amendment Bill. However, the definitions are expected to be present in the GST legislation. It is suggested that such definition is exhaustive to prevent any future dispute with respect to levy of additional tax of 1%.

Hence, contrary to popular belief, issues similar to issues currently prevalent in the current regime may also be foreseen in the GST regime

Conclusion: One has to consider that the need for taxing inter-state supply of goods has been a key cornerstone of the introduction of levy of GST. The primary reason for the same as has been discussed in earlier editions of GST Cafe is to ensure seamless flow of credit of taxes among states. Under the current regime, VAT credit of taxes paid in the state of manufacture does not get passed on to the ultimate consumer if the finished goods are supplied out of state. This causes cascading effect.

GST proposes to extend the levy to supply of goods as opposed to sale of goods under the present regime to bridge the gap. Taxing interstate supply of goods at the GST rate (CGST plus SGST) presents solution to this issue as tax paid at the GST rate (CGST plus SGST) on inter-state supply in the origin state would be available as credit in the destination state.

However, the proposal in its current form of an additional levy of 1% on inter-state supply of goods regardless of whether such supply is in course of sale or otherwise is visibly retrograde especially considering that the tax paid cannot be claimed as Credit.

It may be noted that the Canadian GST model at the time of its introduction also levied a similar additional tax. However, such additional levy came with its own expiry date. However, in the Indian situation, the GST Council has the power to extend the levy beyond the proposed interim period of 2 years. This presents a major concern of the additional levy remaining over a long period of time.

© 2015, Vaish Associates, Advocates,
All rights reserved with Vaish Associates, Advocates, 10, Hailey Road, Flat No. 5-7, New Delhi-110001, India.

The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Shammi Kapoor
Shilpa Sharma
In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions