The goods and services tax (GST) Council has approved the rates of compensation cess for five luxury/demerit items. The proceeds from the cess will go into the compensation fund which would be used to bridge any tax revenue gap for states in the first five years of GST. The items that will be levied with the cess are pan masala, tobacco, coal, aerated drinks and motor vehicles. While these items, commonly known as sin or demerit goods, have been assigned their GST rates, the cesses will be levied on top of that. Except coal, all the other items will be taxed at the maximum GST rate of 28%.
The Council in its earlier meeting has fixed a cap on cess to be levied on these goods and the final rates are close to the maximum ceiling in many goods. For example, coal will attract a cess of Rs 400/tonne, same as the upper ceiling. Similarly, products made of tobacco including cigarettes will be charged with a range of levies starting from 61% and going up to the maximum level in case of some items.
Additionally, a rate of 12% will be levied on aerated drinks while the ceiling has been fixed at 15%. In case of motor vehicles, the maximum allowable sin tax was 15% which will now be levied for cars with over 1500cc engineer and other sports and luxury cars. Smaller cars will only be taxed at 1%. The states are being compensated under GST as the new regime, to be implemented from July 1, is a destination-based tax which enriches the consuming states but the manufacturing states stand to lose revenue. The manufacturing states were persuaded to be a part of the GST with the prospect of compensating any fall in revenue.
The council had earlier computed the compensation based on states’ relevant revenue base of Rs 4.42 lakh crore in 2015-16 and assuming 14% annual growth. Any shortfall in the projected growth would be paid to the states from the compensation fund. While the compensation was earlier pegged at about Rs 55,000 crore a year, it is now felt that the figure could be far higher — up to Rs 90,000 crore in the first year after GST is brought in — given that states’ revenues have taken a hit due to demonetisation.
The Council has all but approved the rates of 1,211 line items. However, some of the controversial line items — biri leaves, biscuits, biri, textiles, footwear, branded food grain and flour — will be taken up in the next meeting on June 3. It also needs to approve the two remaining rules under GST from the set of nine original rules. Apart from these, the fifteenth council meeting will also take up five set of rules that are still in the draft state.