Never-ending saga of sin tax: What if murder is taxed at Rs 1 crore, rape at Rs 5 crore?

By Moses Raj GS, Sangeetha Thomas* 
What should have ended by June 30, 2022 as a 5 year experiment has resurfaced. The government has extended the levy of GST compensation cess by another 4 years till March 31, 2026. This cess, dubbed as the sin tax imposed on sin(ful) goods, is double the highest slab on indirect taxes. But only a few pay for it and the majority benefit, unendingly.
The year 2017 is a landmark year for indirect taxes. With the grand idea of ‘One Nation, One Tax’ as a fiscal slogan subsuming all State based taxes such as octroi/entry tax, Value Added Tax (VAT), sales tax, taxes on lottery, betting and gambling, luxury tax, purchase tax, entertainment tax, property tax, professional tax and central sales tax into a single framework of Goods and Services Tax (GST) changed the contours of revenue collection.
Complicating it further, India, with each State having its own size and revenue problems, has the most complex and highly centralised indirect tax structure in the world with 4 slabs of 5 - 12 - 18 - 28% with each slab divided equally into CGST and SGST with goods moving in and out of these slabs at the mercy of the GST Council every financial year. Not to mention a special 3 per cent rate for gold, jewellery and precious stones and 1.5 per cent on cut and polished diamonds.
GST as a fiscal revolution penalised manufacturing States and shifted the burden to the consumers, changing the entire focus from origin based to destination based tax. While states lost the power to impose revenues, a formula to pacify them was the Goods and Services Tax (Compensation to States) Act 2017 which allowed a levy of GST compensation cess as a mandatory charge on goods which were already in the highest tax slab.
This cess ensures 14% annual revenue growth to all states for lost revenues due to GST. Products such as coal, tobacco, cigarettes, hookah, aerated waters, high-end motorcycles, aircraft, yacht and sports utility vehicles are now considered an abomination by the state waiting to be punished, inviting cess and deeming it sin.

Moral dilemma of sin sax

Economics terms goods that are undesirable yet consumed in large quantities and which can be easily accessed in the black market if the state were to ban as demerit, luxury or as sin goods. A tax to stop the consumption of these goods is a natural step. Ironically, this is a moral dilemma to the policymakers as the law which taxes these goods to prevent people from consuming in effect should ensure that people continue to consume these goods irrespective of the harmful effects.
If people were to stop consuming tobacco products or drugs, for instance, there can be no tax, and by that understanding no more sin in the society. But that is not the reality. If the price of tobacco products is increased exponentially, people will still consume them, whatever be the cost. Alternatively, the same products will enter through the black markets or be smuggled as a cheaper variant, perhaps more toxic with adulterated ingredients used given the lower cost, and people will still have access to them.
Banning then is not a solution but to regulate as is the rise in spurious liquor cases in Gujarat and Bihar where prohibition is in place. Interestingly, the idea of sin tax changes with every budget as and when the government feels that certain goods should be declared sinful. But taxation is a compulsory charge if it's in public interest and will fail a judicial review, leading to the state enjoying monopoly of levying taxes as it deems fit.
If the aim of the state is to criminalise the consumption of a certain class of goods, then it's only fair to impose tax on heinous crimes as they are sinful too. Hypothetically, what if murder was taxed at Rs 1 crore and rape at Rs 5 crore? The accused who can afford this money will pay and acquit themselves of the crime and the ones who cannot will borrow or steal to pay the so called crime tax as ultimately the state needs revenue.
Again, it’s the have-nots who are affected. Instead of taxing a crime, the state brands a person as a criminal, incarcerates for a considerable period of time and once the sentence is completed, reintegration into the society is tarnished as shame, stigma and taboo of a being criminal will forever be labelled and family refuses to accept them. How to reconcile a sin tax versus a social crime which are both anathema to the state?
While consuming alcohol is not a victimless crime as the person loses all earnings and that affects the family leading to domestic abuse and neglect of children, and hence is right to be taxed and yet cannot be eliminated. The cost of running penal institutions is taken out of the very tax that is imposed on such demerit goods and hence defeats the purpose.
The success of the state's resort to propaganda by channelling ideologies to ensure consumption of demerit goods is also limited. Comparing murder with alcohol consumption can be a far strech as murder is not a good or service in the strict definition of tax incidence.
However, imposing a tax on prostitution or euthanasia rather than outright ban can be deemed as a service but this would also mean legalising these trades and bringing a regulatory agency. In any case, from a moral standpoint, in the name of sin tax, the government is preaching to people what is good and evil and makes money out of it too. At all times, the moral dilemma of sin tax to eliminate sin is not realised but only serves the fiscal requirements by banking on people’s consumption habits.

GST compensation cess

The introduction of GST was not welcomed by States in general, as the division of federal powers were further undermined, giving the Centre access to tax goods and services supplied within the State (CGST). Further, the division of Integrated GST (IGST) between the Centre and the consumer State added fuel to the fight against introduction of GST. The concept of compensation was used as a bait to ensure that the States ratified the 101st Amendment of the Constitution who were willing to let go of their taxing powers in return of a guaranteed compensation.
This ushered in the present GST compensation cess which was meant to be collected as compensation to the States for the difference in revenue generation but rather can be considered an incentive to States to accept GST. Interestingly, this cess is collected from people who consume those earmarked sin goods and not from the States as is the case with SGST.
The fact that the Centre presumed that state revenues would grow at a rate of 14% year-on-year on a base year of the state’s tax revenue in 2015-16, was by itself faulty, since the GDP growth in the financial years of 2015-16 and 2016-17 were below 12%. COVID-19 only decelerated this revenue collection as the country went into a lockdown mode for almost 2 years.
This clearly indicates the Centre was using the GST compensation as a means to pacify and encourage States to accept GST and also control consumption of certain kinds of goods by consumers. The GST Compensation to States Act, 2017 and GST Compensation to States Rules, 2017 were challenged on the basis of its constitutional validity in 2017 itself. However, the Supreme Court declared the cess is not a colourable legislation and upheld the power of the Centre to impose such cess under Article 270 read with the objectives of the 101st Constitutional Amendment.
As compensation to the States was a temporary arrangement of 5 years, the GST Compensation to States Act, 2017 was meant to cease by June 30, 2022. However, due to pressure from States, the Centre has further extended the period of the compensation cess to March 31, 2026.
The Centre is forced to comply with this requirement because there always seems to be a possibility that the States, if not for the compensation, might revolt against the GST regime and make demands to return back to the old tax structure. This move by the Central government to keep alive the compensation is most definitely a sigh of relief for the States, but not so for the consumers who are affected and pay a premium.

Extended till March 31, 2026, GST compensation cess, dubbed as sin tax imposed on sin(ful) goods, is double the highest slab on indirect taxes

The fact that the compensation to States is used as a means to keep the States at bay from refuting the GST regime poses a danger to the consumer to be part of a never ending saga of compensation cess. This is because funds for compensation to States can be garnered by the Centre through revision of the cess compensation formula, increase in rates of cess by bringing more commodities within the ambit of cess or borrow funds from the market.

Though the Central government had made the suggestion to States to borrow funds from RBI for deficit in the compensation fund, in any further cases of deficit of compensation fund, the most viable option for the Centre would be to either increase the rates of cess or bring more commodities within the ambit of cess. The general reluctance of the courts to review tax matters and declare them invalid, due to the specific nature of tax would also make it difficult for the consumer to approach the courts for a remedy.

However, even though tax laws are generally never struck down on violation of rights, a cess under Article 270 can be imposed only up until the cause of collection is valid. There is also a condition that the amount collected as cess can be used only for the specific purpose for which it is collected. This would mean that sooner or later, compensation cess would have to be put to an end. This would create a situation of States being unhappy about the GST regime.
It is in anticipation of such circumstances that the States have recommended to include the GST compensation cess as a new slab of the GST regime which would permanently provide the Central and State governments a boost in their revenue. If such a slab is included, the Centre will justify the high rates imposed on select goods and maybe services (complete discretion of Centre to decide what amounts to sinful goods or luxury goods) on the well recognised principle of intelligible differentia making it almost impossible to challenge the same before the judiciary.

GST Council: first among equals?

The GST Council is a recommendatory body that was introduced through the 101st Amendment of the Constitution under Article 279A. Comprised of the Finance Minister as the Chairperson, the Minister of State for Finance and State finance ministers, the GST Council uses a hierarchical voting pattern with the Centre having a weightage of one-third votes and the States getting two-third votes. Given the unequal decision making, many state finance ministers have skipped the meetings.
The GST Council has been given wide powers with regard to the implementation and supervision of the GST regime. Some of the powers are to make recommendations regarding the goods to be included within GST, determination of tax slabs, determination of goods categorised within ambit of GST compensation cess and other indirect tax issues.
This may while dealing with levy of ocean freight in Union of India vs M/s Mohit Minerals Pvt Ltd the Supreme Court had looked into the binding effect of the recommendations of the GST Council and categorically stated that Parliament and State Legislature are not bound by the recommendations of the GST Council due to its unbalanced voting mechanism.
However, despite this strong observation by the apex court, the Minister of State for Finance informed the Rajya Sabha in July that the recommendations of the GST Council are binding on the legislature. This conflict of interpretation would lead to violation of Article 265 of the Constitution that set out to achieve -- that no tax shall be imposed, levied or collected without the authority of law, the meaning of law being restricted to law made by the legislature and not a subsidiary or ad-hoc authority.
If the legislature is mandated to follow recommendations of GST Council which comprises mainly members of the executive from the Centre and various State Governments, the legislature would have no choice but to comply with the same and make laws according to the whims and fancies of the GST Council and negates the very foundation of Article 265.
It can also be stated that it is for this very reason that the recommendations of the Finance Commission (which also includes various aspects of tax) are not binding and merely advisory in nature so that discretion is given to the Legislature to decide which recommendations need to be acted upon.
The affirmation of such wide and unguided powers to the GST Council with regard to application and implementation of the GST regime would work against the Constitutional safeguard provided under Article 265. Ultimately, the GST Council would lean towards continuation of the compensation cess or maybe introduce it as a different tax slab as the recommendations are binding and oblige the Legislature to make necessary changes to the GST laws.
The pandemic gave a fiscal shock of such magnitude that the Finance Minister declared the arrest in economy as “act of God” and told the States to fend for themselves from the open market without fully depending on the compensation cess for revenue shortfall. Moreover, this cess based hand-holding will further exacerbate when there’s recession and high rates of inflation.
While this might be a reality check to cooperative federalism, consumers will continue to bear the brunt of high taxes through cess irrespective of which state they belong to.
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*Teaching tax at St Joseph’s College of Law, Bangalore. The views are personal