NEW DELHI: Notwithstanding criticism, the government is of the view that the proposed cess on luxury and sin goods under the goods and services tax (GST) regime is the best way of creating a corpus to compensate states for any revenue loss, as consumers will have to pay significantly more if the fund is financed from regular taxes.
The government is also firmly backing its four slab-GST structure as it feels it’s the most appropriate system for a country where indirect taxes contribute a big percentage of the exchequer’s revenue and where tax rates on mass consumption items should remain low.
The proposed tax structure has been criticised for being complicated and one that defeats the purpose of a single neat GST while the cess is seen as distortionary and one that would lead to cascading of taxes.
The GST Council, the apex body on the new tax regime, will meet again on November 3-4 to freeze the tax rate. The government is confident that consensus on the cess and the slabs will be arrived at in this meeting.
The government is targeting a Rs 50,000-crore corpus to fund states for any loss of revenue under GST and has proposed a cess on luxury and sin goods for this purpose.
The benefit of the cess is that it would entirely accrue to the Centre and could then be distributed to states.
The other option, backed by some states and experts, is to raise the highest tax rate instead as cess would cause cascading of taxes and would distort the GST. But, under this route, to create the Rs50,000-crore fund, the government estimated it would have to raise revenues of over Rs1.7 lakh crore from tax paying consumers.
This is because of two reasons — 42% devolution out of Centre’s taxes to states under the Fourteenth Finance Commission and sharing of GST.
In order to retain Rs50,000 crore in the compensation fund, the centre would need about Rs86,000 crore in additional tax before 42% devolution to states.
The NITI Aayog has also defended the cess despite its shortcomings in that there would not be input tax credit and said that it would anyway be temporary, as it would compensate the states for loss of revenue in the first five years of GST.
Former finance minister P Chidambaram has criticised the proposed multiple rates. “A well designed GST is expected to have standard rate, plus and minus standard rate.
That latitude interpreted to me as multiple rate — zero to 100 — that’s not GST. That is simply existing VAT rates in a new shape, old wine in a new bottle,” he had said.
But the government is keen to press ahead with the four slab structure for GST, as it believes this is the best way of ensuring against revenue loss, while at the same time protecting consumers.
Under the proposed structure, some goods will be exempted from GST while others will be levied 6%, 12%, 18% and 26% rate.
The government expects goods taxed at 6% to account for 7.08% of tax base, the 12% slab to account for 28.3%, the 18% slab to account for 31.04% and the highest 26% rate to account for 24.8% of total revenue. Gold taxed at 4% will get the balance 8.7%.
European countries too have multiple levies and if one takes into account the differential VAT rates for tobacco and alcohol, most of these countries effectively have four rates.
Source: Economic Times