Fitment panel to examine compensation cess structure for pan masala

To review the feasibility of MRP-linked compensation cess rates

The fitment panel, comprising revenue officials of both the Centre and states, will examine the tax structure for the compensation cess on evasion-prone commodities, such as paan masala and assorted tobacco products, and whether differential tax rates may well be rationalised, a government official told Business Standard.
 

The move follows a report by a Group of Ministers (GoM) proposing a change to the cess component of the tax, which is to be linked with the maximum retail price (MRP) at which these products are sold to consumers.
 

 The Goods and Services Tax (GST) Council, at its February meeting, approved a report by the ministerial panel, led by Odisha Finance Minister Niranjan Pujari.
 

At present, such items attract the highest GST rate of 28 per cent, along with a compensation cess. The cess component of the tax is currently based on the actual transaction (sales) value of the item (ad valorem tax). For instance, the rate of cess on tobacco products is 290 per cent, while that on paan masala 135 per cent.

The panel report, however, pitches for a specific tax rate based on the retail sale price, which subsumes all taxes, local or otherwise, freight charges, delivery, packaging, etc, while GST continues to be levied on transaction value.
 

“The panel will review the structure proposed by the state panel and see the feasibility of linking those with product MRP. The idea is to curb the growing menace of evasion in the sector,” said an official referenced earlier. The review will take time and may be finalised at the next Council meeting, he added. 

The GoM report has proposed a cess structure, linking it with the retail sale price of at least 38 such commodities. These include paan masala, hookah, chillum, and chewing tobacco, ranging between 12 per cent and 69 per cent. It also compared the same with the ad valorem tax structure.
 

“Converting the ad valorem tax into a specific tax will boost the first stage (manufacturer level) collection of revenue. This may be done if the cess is linked with the retail price of the product,” said one of the panel members.
 

He added that these changes can be made to the compensation cess component of the tax, seeing that in the subsequent stages, there is no other input tax credit than the compensation cess paid in the earlier stages.

“It is essential to ensure that the GST and cess structure on tobacco products, including paan masala, satisfy the twin objectives of revenue enhancement and prevention of GST evasion,” said M S Mani, partner, Deloitte India.

Under the old excise regime, such products were taxed based on the maximum machinery capacity installed, not on the actual production and sales.

Under the GST regime, the actual transaction is the tax base. After the GST was rolled out on July 1, 2017, some states demanded reverting to capacity-based taxation for the tax evasion-prone sector.

The state panel, however, rejected the idea of capacity-based taxation, saying it was against the spirit of the GST regime.

Since GST works on a value-chain basis, capacity-based taxation will also make it difficult to administer input tax credit, as wholesalers and retailers don’t operate in a capacity-based mechanism.

The GoM also proposed a track-and-trace mechanism for such commodities.

“This requires detailed study associated with its systemic and legal framework to implement it,” observed an official.

REPORT FINDINGS

• A report by a Group of Ministers (GoM) suggests a specific tax levy link with the product’s MRP
• This will boost manufacturer-level tax collection and plug leaks: GoM
• The compensation cess is now based on the actual transaction of the item
• A suggested specific levy on 38 items, ranging between 12% and 69% of MRP