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GST Council meeting: Additional cess to flow into compensation fund to pay states for revenue losses

In case of a higher GST rate, the Centre will have to impose a much higher rate so that it is able to retain the compensation amount even after 42 per cent devolution to states.

Written by Aanchal Magazine | Alka Pande & Ravish Tiwarilucknow/new Delhi, New Delhi |
October 21, 2016 2:35:51 am

Even as the states and the Centre are engaged in a tussle over the imposition of cess on luxury and ‘sin’ goods over and above the higher rate of 26 per cent under the proposed four-tier Goods and Services Tax (GST) rate structure, a separate compensation fund to facilitate flow of revenue through cess was proposed in the third GST Council meeting, which concluded on Wednesday.

“A separate compensation fund is proposed to be created in Public Account which shall not lapse after the end of the financial year. The revenues raised through cess for the purpose of payment of compensation to states shall be credited to this fund and payment of compensation to states be made from this compensation fund,” the agenda of the third GST Council meeting stated.

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After the period of five years, any balance amount available in the GST compensation fund shall also be devolved to the states as per the recommendations of the Finance Commission, it said.

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The Centre has proposed the levy of additional cess for luxury and ‘sin’ goods such as tobacco, cigarettes, pan masala and aerated drinks to be able to compensate states for five years after the rollout of GST. Even though all other cesses will be subsumed into GST, the Centre will continue to levy clean environment cess on coal, peat and lignite. The Centre has also proposed to continue collection of the National Calamity Contingency Duty, presently collected as a cess, for the purpose of funding the National Disaster Relief Fund.

The Centre would “need to raise revenues over and above its present revenues” to be able to compensate the states for five years, the agenda stated. Under the proposed GST regime, the Centre wants to protect its revenues which it had collected in 2015-16 totalling Rs 4.43 lakh crore, excluding revenues from petroleum products. The total revenue that Centre wants to protect includes Rs 1.95 lakh crore from basic excise duty, countervailing duty and special addition duty collections, Rs 2.06 lakh crore of service tax collections and Rs 40,874 crore of cesses and surcharges.

The total revenue collected by Centre from cesses and surcharges imposed on taxes (excluding taxes on petroleum products) was Rs 23,707 crore. “Since taxes accruing to Centre under GST would devolve to states and only 58 per cent shall be retained by the Centre, revenue from cesses to be protected by Centre has been taken as 23,707/0.58 = Rs 40,874 crore,” the agenda said. 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.

Enlisting the advantages of raising funds for compensation through cess as against an increase in GST rate, the Centre has said that the tax burden will be minimal since the rate of cess will be the difference between the current tax incidence and higher tax slab of 26 per cent. In case of a higher GST rate, the Centre will have to impose a much higher rate so that it is able to retain the compensation amount even after 42 per cent devolution to states. Also, the impact on inflation shall be less if additional revenue is raised through cess, the agenda for the GST Council’s meeting said.

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