But businesses impacted need to be informed well in advance since they have to prepare accordingly
By MS Mani
When the GST Act was enacted, one of the stated objectives was to eliminate the multiple cesses and duties levied in addition to the existing indirect taxes. While this objective was largely achieved, it was considered necessary to levy a compensation cess (cess), in addition to the GST, on certain goods such as automobiles, cigarettes, paan masala, etc. This levy was considered necessary to establish a fund pool that would compensate states for their revenue losses for a period of five years (transition period) after the introduction of GST.
Accordingly, the compensation cess was to be levied for a period of five years after introduction of GST; the period for the levy of the cess, as it exists now, is till June 30, 2022.
The collections from the cess totalled approximately Rs 98,000 crore during 2018-19 and 2019-20, as the accompanying graphic shows.
It is interesting to note that the compensation cess per year has been around Rs 1 lakh crore, except in case of 2016-17 (the GST introduction year) and 2020-21 (the pandemic year).
However, the formula for compensating the states for revenue losses, in terms of the Goods and Services Tax (Compensation to States) Act 2017 (CCA), does not provide any exceptions in the nature of a force majeure. Further, section 3 of the CCA contemplated a projected growth rate of state tax revenues of 14%, considering the base year as 2015-16.
The decline in the economic activities on account of the pandemic had led to significant decline in the GST and cess collections, leading to a deficit in the compensation cess pool. The states’ tax revenues also declined significantly on account of the pandemic, and hence the deficit that states were facing widened compared to the past. This led the Centre to take recourse to the borrowing route to keep its commitment to fund states’ tax deficit with the understanding that repayment of the borrowings would entail an increase in the period for which the cess would be levied.
An increase in the period of the cess beyond June 2022 does now appear to be inevitable, considering the needs of states, which have seen a decline in their tax revenues and an increase in their healthcare costs over the past 18 months. Since the cess is levied by manufacturers of certain products and passed through the value-chain, it is essential to provide clarity to these businesses well in advance if it is decided to continue with the cess, so that they are well prepared to continue levying the cess. It is essential to bear in mind that, in addition to the Centre and the states, the businesses that charge, collect and deposit the cess are key stakeholders whose views should be sought in any decision to extend the cess or alter the manner of its levy.
While elimination of the cess should be attempted after a year or two so that it does not become an additional tax, as was prevalent prior to the introduction of GST in India, it is necessary to provide a clear roadmap to impacted businesses, well in advance.
The author is Senior director, Deloitte India