Applicability of Kerala Flood Cess

The GST Council in its 32^nd meeting held on January 10, 2019, approved levy of State Specific Disaster Cess, like cess for collecting funds in light of recent floods in Kerala.

To effectuate the same, the Kerala Finance Minister, Dr. Thomas Issac in his Budget Speech (2019-20) on January 31, 2019, proposed a levy of Kerala Flood Cess (‘KFC’). The Kerala Finance Bill, 2019 (Clause 14) contains the relevant provisions and the same has been placed before the Legislative Assembly for passage.

This update is to capitulate important aspects of KFC:

• KFC will apply on intra-state supply of goods and services by a taxpayer. The cess will apply on last point of supply i.e. sale to unregistered dealers or consumers.
• Rate of KFC will be 1 percent on goods falling under GST bracket of 12 percent, 18 percent and 28 percent (no cess shall apply on goods falling under GST bracket of 5 percent and exempt goods).
• Rate of KFC will be 25 percent on goods falling under GST bracket of 3 percent (like gold, silver and platinum ornaments).
• Rate of KFC will be 1 percent on services including services falling under GST bracket of 5 percent like GTA service, canteen service etc. (no cess shall apply on exempt services).
• Supplies between registered persons (B2B supplies) will not attract levy of KFC.
• KFC will not apply on supplies made by a composition dealer.
• KFC will be levied for a period of 2 years from date notified in the official gazette.

The Kerala Finance Minister also hinted that KFC will come into effect from a later date since changes will also be needed in GSTN for introduction of the cess.

(Refer: https://www.business-standard.com/article/pti-stories/flood-cess-not-from-april-kerala-fm-119020601120_1.html).

Some examples explaining the applicability of cess are tabulated as under:

NITYA Comments:

The imposition of KFC will dilute the structure of ‘One Nation One Tax’ and will bring tax arbitrage by bringing disparities amongst the States. The consumers in Kerala will prefer inter-state procurement of goods and services rather than local procurements.

It is also ironic that considering the floods, goods and services ought to have been cheaper in Kerala whereas imposition of KFC will make them expensive. 

Taxpayers making intra-state supplies in Kerala to unregistered persons should start making changes in their IT systems to adapt to these changes.