Apart from finalising the indirect tax rates, the GST Council on Thursday decided to impose cess over and above the highest rate of 28 per cent on demerit goods such as luxury cars, aerated drinks, pan masala and tobacco products. Collections from cess will be put into a separate fund, from which the Centre will compensate states for any revenue losses for a period of five years.
The Centre will keep 58 per cent of the collections in the compensation fund, while the remaining 42 per cent will be given to the states. Finance Minister Arun Jaitley said the demerit goods currently attract tax rate of around 40-65 per cent. Since the maximum GST rate has been decided at 28 per cent, imposition of cess will enable the government to protect tax collections on such items.
“Now there are items which are taxed at much higher rates. There are luxury products, and demerit goods. These include aerated drinks, pan masala, luxury cars and tobacco products. Taxation on these is much higher than 28 per cent. In fact, tobacco is about 65 per cent, others are close to 40 per cent,” Jaitley said in a briefing after the GST Council’s meeting.
“So the additional amount we charge on these products would be currently charged as a cess. Now this cess plus the clean energy cess on user of coal jointly will constitute the compensation pool which will have a sunset clause of 5 years and will be reviewed on year-to-year basis,” he said. Collections from clean energy cess, which were Rs 12,623 crore in 2015-16, will also go to the compensation fund.
While the initial proposals were to subsume as many cesses into the GST regime, the GST Council has for now decided to continue with the imposition of cess on demerit goods. The reason is that revenue collections through cess and surcharge have become a significant component of the Centre’s tax kitty over the years, accounting for more than 18 per cent of the total tax collection of Rs 9.47 lakh crore in 2015-16.
The Central government collected a total of Rs 1.77 lakh crore through cesses and surcharges in 2015-16 by way of 33 different cesses and six surcharges in 2015-16.
“Cess needs to be levied only at the final product and total tax including cess on demerit goods should be kept within the present overall indirect tax incidence,” said Confederation of Indian Industry president Naushad Forbes. The government will create the compensation fund in the Public Account for a period of five years. After five years, any balance amount available in the fund shall also be devolved to the states as per the recommendations of the Finance Commission.
According to the Constitution (One Hundred and First) Amendment Act for GST, the Parliament shall on the recommendations of the GST Council provide for compensation to the states for loss of revenue arising on account of implementation of GST for a period of five years.
Since petroleum products are out of the GST net, the cess imposed in that sector are expected to be continued in the present form. The Union government had received the highest amount through additional duty on excise on motor spirit and high speed diesel, popularly known as the “road cess” and used for development and maintenance of national highways/other roads and railway crossings.
The government collected a total of Rs 73,000 crore through the road cess in 2015-16 — Rs 55,000 crore on high speed diesel and Rs 18000 crore on motor spirit.