The idea of putting cess on luxury items and sin goods for compensating states for any possible revenue loss is a bad idea. It is against the very basics of goods and services tax (GST) of a simple and non-cascading tax structure.
That the GST council could not reach a consensus on the rate framework and had to end its meeting abruptly to meet again on November 3 and 4, and then November 9 and 10, to find a workable solution is a clear indication of the uneasiness over the issue that will ultimately decide whether the tax reform will get implemented from the proposed April 1, 2017, date or not.
What is really worrying is the idea of imposing cess over and above GST on luxury items like big cars and also sin goods like tobacco and alcohol, which in all probability will open a Pandora’s box of confusion.
This would mean that if the centre and the states agree for four slabs, say, of 6%, 12%, 18% and 26%—and the effective rate of tax at present on an item A is 46%—then a cess of 20% will be put on that item.
So, another product B having an effective rate of 36% will have a cess of 10%. This in effect means that different products will attract different rates of cess.
The bigger problem with cess is that it is very difficult to remove it once it is levied and the list of products under cess may only grow, besides the fact that it is difficult to label a product as luxury today.
Pratik Jain, leader (indirect tax), PwC India, is bang on target by saying that, “cess will lead to complications and it is better to increase the floor rates by one or two percent instead of bringing in cess”.
Prime minister Narendra Modi and finance minister Arun Jaitley must convince the states to go with the four or five floor rates scheme that has been proposed along with the commitment to compensate them for any losses and drop the idea of cess.
In the end, it would not be surprising if there will be no need for compensation at all.
Why inflict the GST with clumsy cess which can prove to be suicidal.