Test legality of cess by the Centre: Rajeev Dimri

The ideology behind GST is to reduce the multiplicity of existing indirect taxes and implement a uniform taxation structure across the nation. A perfect GST would have been wherein all the goods and services are taxed at a single tax rate, subject to minimal or no exceptions. However, for a country like India, tiered tax rate structure becomes inevitable to take into account the larger social agenda. That said, stretching the deviations to the extent of imposing cesses over and above GST for certain products would effectively turn GST into a common umbrella hosting several other taxes and cesses, which is against its primary intent. Such a proposition might take the GST structure back to the rigours of the existing system.

If consensus is reached on additional cesses for luxury items and sin goods, it is critical to ensure that credit of these cesses is not restricted to flow through the value chain and should be kept fungible with other taxes such as CGST (central GST) and IGST (integrated GST). If the current framework of allowing credit of cess against the same cess is continued under GST, cascading of taxes would continue even under the GST regime which would vitiate the core principles of GST. Businesses buying goods with levy of cess but not having an output cess liability will need to absorb it as an additional cost.

Similarly, the taxpayers having output cess liability without any input cess credits would have to discharge the same in cash and possibly even leading to unnecessary input tax credit accumulation. Thus, credit mechanism for cesses must work in a manner that its incidence flows to the final stage of consumption without any cascading. Further, an additional challenge would be to maintain separate credit pools and possibly for each state since state-wise registration is required under GST.

If cesses are to apply, it would be incumbent upon the GST Council to ensure the list of goods liable to cesses is clearly defined to curtail the scope of further expansion by the government subsequently. The proposal to levy 'compensation cess' exclusively by the Centre needs to be carefully tested for its legality as the amended Constitution empowers both the states and the Centre to levy GST on goods and services.

Despite the initial reservation expressed by states, it's likely that the state governments will agree to the levy of cesses as the central government would have earmarked funds to compensate them for the initial five years.

Overall, while the final consumer may end up incurring the same tax cost (against paying 40 per cent GST on luxury items, having to pay the lower rate of 26 per cent with differential cess), the business community might face several hardships due to this proposed structure. The government needs to deliberate seriously on the merits of introducing cesses under GST before reaching any consensus at the time when all eyes are set upon India for the upcoming tax reforms.
The writer is leader, indirect tax, BMR & Associates. Poonam Harjani and Himanshu Gupta also contributed to this article.
Views are personal

Rajeev Dimri
Leader, indirect tax, BMR & Associates