Cess on Luxury Cars, Sin Products May Go on Beyond 5 Yrs Under GST

The cess is likely to be extended to bridge any shortfall in funds to compensate states.

Cess on luxury cars under GST is likely to be extended beyond the first five years. (Photo: The Quint)

The proposed cess on items like luxury cars, tobacco products and aerated drinks under the Goods and Services Tax (GST) regime is likely to be extended beyond the first five years to bridge any shortfall in funds to compensate states, said an official document which BloombergQuint has accessed.

In case the GST Compensation Fund fell short of the compensation payable (to states) in any bimonthly period, the GST Council shall decide the mode of raising additional resources including borrowing from the market which would be repaid by collection of cess in the sixth year or further subsequent year.

Official document accessed by BloombergQuint

Finance Minister Arun Jaitley had said that states will be compensated every two months for any loss incurred in the first five years of the new indirect tax regime coming into play.

The cess will be imposed on demerit goods over and above the highest GST rate of 28 percent.

The cess should be earmarked for a specific duration, Mahesh Jaising, Partner at BMR & Associates LLP, told BloombergQuint over the phone. “A possible extension for levying cess will bring ambiguity for industry players dealing with these products from overall pricing and operational perspective,” he said.

According to Satya Poddar, Tax Partner-Policy Advisory Group, EY, a high tax burden on demerit goods is likely to continue even when the cess is withdrawn.

As and when the cess is phased out, GST rate on these products (demerit goods) is likely to be increased to leave the total tax burden on these items the same when the cess was applicable.

Satya Poddar, Tax Partner-Policy Advisory Group, EY

In the wake of the central government’s decision to demonetise high-value currency notes on 8 November 2016, states have demanded that the compensation figure be increased from the Rs 55,000 crore decided earlier.

West Bengal Finance Minister Amit Mitra had pegged the quantum of compensation needed at around Rs 80,000-90,000 crore on the grounds that tax collection in the state fell two percent in November against an 11 percent growth a year ago.

The Council has also approved that 50 percent of the amount remaining unused in the GST Compensation Fund shall be transferred to the Consolidated Fund of India, and the remaining 50 percent be distributed among states and union territories in the ratio of their total revenues from SGST or UT GST in the last year of the transition period.

This is a fair and equitable distribution, and there could be no better arrangement that could be thought of.

Amit Sarkar, an indirect tax expert

(This article was first published on BloombergQuint.)