Finance Minister Arun Jaitley on Wednesday spoke in favour of levy of cess on tobacco and luxury products to compensate states for loss of revenue on Goods and Services Tax (GST) saying that the cost of funding otherwise through a higher tax rate would be “exorbitantly high and almost unbearable”.
“Different items used by different segments of society have to be taxed differently. Otherwise the GST would be regressive. Air conditioners and hawai chappals cannot be taxed at the same rate. Total tax eventually collected has to be revenue neutral. The government should not lose money necessary for expenditure nor make a windfall gain,” he wrote in a Facebook post.
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A four-slab structure of 6, 12, 18 and 26 per cent is under consideration for GST, with lower rates for essential commodities and higher bracket for luxury goods, Jaitley said.
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He said if the Central government has to borrow money to fund states’ compensation, it would add to its liability and increase cost of borrowing for the Centre, state governments and the private sector.
“Assuming that the compensation is Rs 50,000 crore for the first year, the total tax impact of funding the compensation through a tax would be abnormally high. A Rs 1.72 lakh crore of tax would have to be imposed for the Central Government to get Rs 50,000 crore in order to fund the compensation,” he said. “50 per cent of the tax collected would go to the states as their GST share and of the balance 50 per cent in the hands of the Central government and 42 per cent more would go to the states as devolution. So out of every 100 rupees collected in GST only 29 per cent remains with the Centre. The tax impact of this levy would be exorbitantly high and almost unbearable,” he said. He added that if cess is levied, states which benefit out of GST rollout do not have to compensate the losing states.
Jaitley said that the common man will not be burdened as the rate structure has kept out nearly 50 per cent of the weightage of the CPI basket (mainly food items) out of the ambit of GST. In the GST Council meeting last week, some states had expressed concern over the Centre’s proposal to impose cess on demerit goods and luxury goods. The GST Council will meet next week to decide on GST rates. The finance minister said that unlike developed countries, developing nations like India, need more tax slabs. “The reality is that a multiple tax rate in India is inevitable for several reasons… The tax on some products in a narrow slab regime will substantially increase. This would be highly inflationary,” he said.
Jaitley said at present there are several items mainly used by the affluent which are taxed at a VAT of 14.5 per cent and an excise of 12.5 per cent. “If the cascading effect of these taxes and octroi is added, then range of taxation of these products is between 27-31 per cent. It has been proposed to the Council to fix the rate of these items at 26 per cent. Some of the items which are now being used by the lower middle classes will eventually be proposed to be shifted to the 18 per cent bracket. With regard to demerit and luxury goods which are taxed globally at a higher rate, no rebates are contemplated. Each good would be taxed on the basis of its own demerit,” he added.
In the four-slab rate structure, items which are presently taxed at rates closer to the range of each of the slabs will be fitted into the particular rate of the slab. Those presently taxed below 3 per cent as the total tax of the Centre and the states will be taxed at a zero rate. Those between 3-9 per cent will be taxed at a 6 per cent rate, those between 9-15 per cent will be taxed at 12 per cent and there would be a standard rate of 18 per cent, he said.