Centre, states close to agreeing on rolling cess into GST
The Centre and states are close to agreeing on folding the GST compensation cess within the broader goods and services tax (GST), two people aware of discussions in the government said. The two sides are also close to reaching an agreement on how to utilize the surplus cess collected, likely by dividing between them.
Without a decision on its future, the compensation cess levied on luxury goods and tobacco, which is expected to fetch ₹1.67 trillion this fiscal year, clocks out at the end of March next year after an eight-year run.
However, there is no consensus yet on scrapping the 12% GST slab, one of the two people said. However, the Centre’s view is that moving most goods in that slab to 5% will help widen the tax base, making up for the revenue loss in due course. The decision may involve some give-and-take between the Centre and states, the person said.
“Revenue collection should not be seen merely from the lens of tax rate. It is a function of the tax rate and the tax base. Widening of the tax base will likely improve revenue receipts despite lower rates,” the person said on the condition of anonymity.
The GST Council meets next in August end or September, after the monsoon session of Parliament. Queries emailed to the finance ministry and the GST Council Secretariat on 16 June seeking comments for the story remained unanswered.
The compensation cess was introduced to compensate states for their revenue losses due to the transition to GST. Its original five-year period ended in 2022; however, it was extended till 2026 to help states. The cess ranges from 1% in the case of certain motor vehicles to 290% in the case of mixtures used in smoking pipes. On coal, it is ₹400 a tonne and on sports utility vehicles, it is 22%.
The proposed move to scrap the 12% slab may have a short-term impact on revenue; however, subsuming the compensation cess into GST is expected to soften the blow.
The Centre had borrowed ₹2.69 trillion during the pandemic outbreak to support struggling states. Compensation cess revenue was used to make the loan repayments, which conclude before the end of this year. After the repayment, the Centre would be left with a cess surplus about ₹40,000 crore, as per official calculations. Minister of state for finance Pankaj Chaudhary is leading a ministerial panel that will advise the Council about the future of the cess, especially, how to recharacterize it in a new avatar.
Central and state GST authorities have been holding routine drives against fake entities claiming input tax credits and have been stepping up the reporting requirements under the tax system that makes it hard to evade taxes.
Experts said the tax rate rationalization will deliver a stimulus to the economy.
“The government has been trying to boost private consumption, which was the objective behind the income tax relief offered to middle-income earners in this year’s budget. The RBI has also been easing monetary policy to boost consumption demand and stimulate growth. Perhaps an immediate and direct way to achieve this is a GST rate reduction. GST compensation cess could offer a cushion against any short-term impact on inter-state distribution of revenue receipts due to the rate reduction,” said Suranjali Tandon, associate professor, National Institute of Public Finance and Policy (NIPFP).
At present, goods in the 12% slab include butter, cheese, packaged drinking water in 20 litre bottles, jams and marmalades, sausages and similar products, diabetic foods, glucometer and strips, bicycles, wooden furniture and solar power-based devices.
Unlike the pre-GST tax regime, the new indirect tax system is transparent, making the total tax incidence on a product visible to the final consumer. This also puts pressure on policymakers to lower the tax rate.
In this financial year, GST collection of the central government (CGST) is expected to grow at 11.3%, showing a tax buoyancy of 1.1, implying revenue growth faster than nominal economic growth.
