Tobacco, Liquor, Fancy Cars. What Will Cost More As Centre Plans New GST Cess

NDTV

3 days ago

New Delhi:
Cigarettes, carbonated drinks, and high-end cars are among items that may become more expensive if a proposal to replace the expiring compensation cess - in the Goods and Services Tax system - with cesses on health and clean energy, targeting tobacco products and automobiles, is passed.
The Health Cess will apply to 'sin goods' - referring to products usually taxed at higher rates due to their perceived negative impact on society - and others in the higher 28 per cent GST bracket.
The Clean Energy Cess will target more expensive cars and coal, and is seen as aligning with the Narendra Modi government's overall push to renewable or non-polluting energy sources.
Sources told NDTV Profit a panel - the Group of Ministers, or GoM, on Compensation Cess - chaired by junior Union Finance Minister Pankaj Chaudhary is expected to discuss the matter later this month.
Sources also said the GoM is already close to an agreement on the two new levies, particularly since most states are expected to accept continuing to tax goods seen as unhealthy or harmful.
Experts, though, believe swapping one cess for two may not be as easy as that, because the GST law does not allow for a new levy, which could require a constitutional amendment to become law.
The core issue is identifying the beneficiary of the proposed new cesses.
What Is Compensation Cess?
Compensation cess is an additional tax on select goods and services over and above the GST.
It was introduced in 2017 - concurrent with the enactment of the Goods and Services Tax Act - as a way to 'provide compensation to States for loss of revenue' from implementation of the law.
But should the centre collect and keep the new cesses it for itself, the states might object to the loss of revenue, especially since they were promised equal shares in GST revenue to give up their rights.
A new revenue-sharing mechanism will have to be worked out, sources said.
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Compensation cess was to be valid for five years only. It expired in June 2022, but was extended till March 2026 to allow states to repay loans taken to meet pandemic-era compensation shortfalls.
GST Relief For Middle Class?
Meanwhile, sources also said talks are also ongoing over reducing the number of GST slabs, possibly by abolishing the 12 per cent slab.
If passed, this will mean some products taxed at that 12 per cent will fall into the lower tax bracket - i.e., five per cent. Others will be pushed into the higher 18 per cent bracket.
The government believes, source said, products like toothpaste in the 12 per cent category are staples for the middle class and economically weaker sections, and could be taxed at lower rates.
READ | GST Relief For Middle Class? Cheaper Toothpaste, Utensils, Clothes, Shoes
Sources said this is expected to increase the burden on the central government by up to Rs 50,000 crore. The centre, though, is prepared to absorb the initial impact and expects the deficit to reduce long-term because of an anticipated boost in consumption.
Essentially the centre believes lower prices mean higher sales, and this will result in a tax base and increased GST collection.
GST Collection Rises
GST collection in June rose over 6.2 per cent to over Rs 1.85 lakh crore, compared to about Rs 1.74 lakh crore in the same period last year, according to official data released Tuesday.
But June's GST collection was less than May's Rs 2.01 lakh crore and April's Rs 2.37 lakh crore.