While the Centre has mooted a cess on “ultra-luxury items” to create a fund for compensating states in the GST regime, the states have come out against the proposal, saying it negated the principle of GST. “While the Subramanian panel had suggested a demerit rate of 40%, the Centre is now proposing a lower rate 26% for luxury items in order to create space for imposing a cess on them and mobilise resources for compensation. States want a higher rate of 30%-plus on demerit and luxury goods so that the tax rate on essential items can be brought down to 4% (from 6% proposed),” Kerala finance minister Thomas Isaac told FE. Currently, demerit goods attract more than 30%, he said. Isaac also sought a standard rate of 20%-plus.
While the crucial issue of the GST rate structure will be discussed by the council on Wednesday and Thursday, revenue secretary Hasmukh Adhia told FE that the Centre favoured a four-slab structure to start with. “We are suggesting the standard rate to be divided into two — 18% and 12%. And we propose another lower tax slab of 6% (for essential items), considering that there are about 300 items which are currently exempted from the central excise and on which VAT rate is 5%. Now, (the rate on) these items cannot be straight away taken to 12%. And the demerit goods could be brought under the highest rate of 26%,” he said. It may be recalled that the Arvind Subramanian panel had recommended a single standard rate of 18%, a 12% merit rate and a demerit rate of 40% for a clutch of items like luxury cars, aerated beverages, paan masala, etc. He also discussed the options of raising the rate on precious metals to 4-6%.
Jaitley reiterated that the GST structure won’t be inflationary, but said that while states would have adequate revenue, the Centre would need to have way to discharge its obligation of compensating states. It is learnt that the Centre mooted a cess on ultra-luxury and demerit items for this purpose, a proposal opposed by states in Tuesday’s meeting. “Apart from the existing clean environment cess, there could be an additional impost on tobacco, luxury cars and paan masala. All these put together would yield R50,000 crore, which could be used for compensation. The cess proceeds would not come to the Centre and go to a different kitty,” Adhia told FE. In the case of essential and mass consumption items, there won’t be steep increases in rates, he said. Jaitley said that there would only be the least possible burden on the taxpayer.
The revenue secretary added that cess would vary from item to item and would be on end consumption except for clean environment cess. “From the clean environment cess at R400 per tonne, we are expecting R26,000 crore. The idea is that existing tax burden should not come down heavily in case of luxury items. About 25% of the total taxable base would be under 26% rate, 70% of the base under either 18% or 12%,” he added.
The states taxable income to be protected — of taxes to be subsumed in GST (other imposts line stamp duty, registration fee, excise on alcohol, etc, they will continue to levy), needs to be determined in the light of R4.4 lakh crore of such income in 2015-16 and R56,000 crore of CST revenue (which will be absent in the GST regime).