Cessed out

The Hindu Business Line October 21, 2016

The idea of a cess is bad as it will distort theGST structure. The Centre should findanother way to compensate States

And so, the GST juggernaut which had acquired considerable momentum over the last few weeks, has run into a hurdle. The latest meeting of the GST Council, which was widely expected to freeze the rate slabs, has not been able to arrive at a consensus and a decision on rates has been pushed forward to the next meeting. The crux is: What will be the source of funds for the Centre to compensate the States for loss of revenue? Finance Minister Arun Jaitley says there has been a “convergence towards consensus” over levying a cess on so-called luxury and sin goods, in addition to tax at the highest of four slabs of 6, 12, 18 and 26 per cent. The revenue from the cess will be used to compensate the States. Some States have objected to the idea of a cess, and rightly so, as it defeats the concept of a single national tax on goods and services.

Besides setting off accounting issues, a cess would also distort the rate structure and lead to blocked credits. There are better alternatives for the Centre to explore. The simple one would be to find the funds from within the rate structure by raising the highest slab from 26 per cent so that States get to share a part of the higher revenues while the Centre can use its share to compensate the former as it promised. This will also allow assessees to claim tax credits unlike in the case of cess. The problem with this approach though is that it could lead to price inflation in a number of goods and commodities used by the middle class. The other alternative could be increasing the clean energy cess, which will survive GST, and raising the rate on gold — which is now proposed to be taxed at 4 per cent — to 6 per cent. Also, tobacco tax is presently levied only on cigarettes which constitute just about 11 per cent of the market. The Centre should seriously consider bringing in other forms such as chewable tobacco, gutka and bidis into the net. This can be done by imposing the tax at the farmgate on those purchasing raw tobacco from farmers. The advantage here is that with input tax credit across the value chain, there will be a clear audit trail available and the unorganised tobacco processors will also be covered. The final option, of course, is for the Centre to find the resources from the Consolidated Fund, just as it did in the case of VAT compensation earlier. The idea of a cess, clearly, is a bad one and needs to be junked.

Meanwhile, some States appear to have had a rethink on the issue of administrative control of service tax assessees. While earlier the Centre was supposed to control all service tax assessees, the States now want to lord it over service tax assessees with turnover of less than Rs. 1.5 crore, just as in the case of goods. This is but a turf matter and is easier to solve compared to the imbroglio over rates.

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