India is mulling the introduction of a “natural disaster tax” to fund relief efforts

• Following the Kerala floods in late August, it was found that the National Disaster Relief Fund (NDRF) was insufficiently capitalised to finance relief efforts.
  
• In light of this, the Indian government has instituted a panel, comprising several state finance ministers, to assess the feasibility of introducing a “natural disaster tax” under the GST regime.
  
• It remains to be seen whether the cess would be a state-level or national-level tax and whether it would imposed on a specific set of items or all items. A questionnaire will be sent to all states to get their views on the same.
  

In the aftermath of the Kerala floods in late August, in which close to 500 people died and the damages were estimated to be around ₹200 billion, a major criticism was levied at the central government’s slow release of aid funds.

It was found that the National Disaster Relief Fund (NDRF) and State Disaster Response Fund (SDRF) were insufficiently capitalised. In addition, the process of applying for and receiving aid from the corpus fund is extremely time-consuming. The NDRF is funded by a “National Calamity Contingent Duty” on tobacco products and similar items. However, after the imposition of GST last year, the contributions to the fund have been declining.

In light of this, the Indian government has instituted a panel, comprising several state finance ministers, to assess the feasibility of introducing a “natural disaster tax” under the Goods and Services Tax (GST) regime.

The panel, which is led by Bihar deputy CM Sushil Kumar Modi, is set to consult India’s attorney general, K. K. Venugopal, on the legal implications of levying a disaster tax to fund the recovery efforts of states that have been struck by natural disasters.

Under the GST Act, states are allowed to charge a cess in the event that they suffer losses of revenue due to the implementation of the GST regime. A disaster cess would require the approval of an apex court.

The GST Council decided to form the panel at the end of September following a proposal from the government of Kerala to impose an additional 10% cess on specific goods sold in the state so as to fund reconstruction and rehabilitation. At the time, the central government said that the Kerala’s proposal would be difficult to implement given the absence of any tax credits on cesses.

It remains to be seen whether the cess would be a state-level or national-level tax and whether it would imposed on a specific set of items or all items. A national-level tax under the GST regime seems more likely after the panel recognised the possibility that residents of Kerala would opt for large purchases outside the state so as to avoid paying the additional cess.

A questionnaire will be sent to all states so as to establish a majority consensus on the above issues. The panel’s next meeting will be in November.