Cess better than additional tax to compensate states: Jaitley

In order to compensate states for loss of revenue in the Goods and Services Tax (GST) regime, a cess on tobacco and luxury goods is an option preferable over additional tax, which will be exorbitantly high, Union Finance Minister Arun Jaitley said on Wednesday.

"Assuming that the compensation is Rs 50,000 crore for the first year, the total tax impact of funding the compensation through a tax would be abnormally high. A Rs 1.72 lakh crore of tax will have to be imposed for the central government to get Rs 50,000 crore in order to fund the compensation," Jaitley, who chairs the GST Council, wrote in a Facebook post ahead of its next meeting here on November 3-4.

"Fifty per cent of the tax collected will go to the states as their GST share and of the balance 50 per cent in the hands of the Centre, 42 per cent more will go to the states as devolution."

"So, out of every 100 rupees collected under the GST system, only 29 per cent remains with the Centre. The tax impact of this levy will be exorbitantly high and almost unbearable," he said.

"Different items used by different segments of society have to be taxed differently. Otherwise, the GST will be regressive. Air conditioners and hawai chappals (flip-flops) cannot be taxed at the same rate. Total tax eventually collected has to be revenue neutral. The government should not lose money necessary for expenditure nor make a windfall gain," he added.

Jaitley proposed, instead, imposing cess, which would be subsumed in the taxes after five years.

"This will include cess on clean energy, luxury items and tobacco products, which in any case presently also pay levy higher than 26 per cent. This will ensure no additional burden on the taxpayer and yet be able to compensate the losing states," he said.

The Finance Minister said if cess is levied, the states which benefit from the GST will not have to compensate the losing states.

"The Centre, as a non-beneficiary, has to compensate and the proposal for continuing existing cesses for five years to the extent of compensation required is the more benign way of compensating the losing states without burdening the taxpayer," he said.

On the crucial issue of the tax rate structure, which three earlier meetings of the GST Council failed to decide, Jaitley said a four-slab structure of 6, 12, 18 and 26 per cent is under consideration, with lower rates for essential commodities and higher ones for luxury goods.

It has also been proposed that items constituting nearly 50 per cent of the weightage in the Consumer Price Index basket, which are mostly food items, be exempted from the levy.

"There will be a zero tax on such items. The object of this is to ensure that the GST structure is not regressive or burdensome on the common man," he said.

"The reality is that a multiple tax rate in India is inevitable for several reasons. The tax on some products in a narrow slab regime will substantially increase. This would be highly inflationary," the minister added.

The principal rationale behind the four-fold tax structure proposed is that items which are presently taxed at rates closer to the range of each of the slabs will be fitted into the particular rate of the slab.

"Those presently taxed below 3 per cent as the total tax of the Centre and the states will be taxed at a zero rate. Those between 3-9 percent will be taxed at a 6 per cent rate, those between 9-15 per cent will be taxed at 12 per cent, and the standard rate will be 18 per cent," Jaitley said.

"Some have suggested that multiple tax rate is disadvantageous to the GST and would neutralise some of the advantages of a uniform tax structure," he said.

While the GST would necessarily bring about a seamless transfer of goods and services across the country, most commodities would be taxed at lower than present levels, he added.

--IANS

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