FM favours cess over additional tax for compensating states

Finance Minister Arun Jaitley today favoured levy of cess on tobacco and luxury products to compensate states for loss of revenue on GST saying the cost of funding that through an additional tax would be "exorbitantly high and almost unbearable".

Ahead of the meeting of all powerful GST Council next week to decide on GST rates, Jaitley said the 4-slab structure of 6, 12, 18 and 26 per cent was under consideration, with lower rates for essential commodities and higher bracket for luxury goods.

"Different items used by different segments of society have to be taxed differently. Otherwise the GST would be regressive. Air conditioners and hawai chappals 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 wrote in a Facebook post.

Explaining the rationale for cess, Jaitley said if the central government has to borrow money to fund states' compensation, it would add to its liability and increase cost of borrowing for the Centre, state governments and the private sector.

He said there is no rationale for increasing direct tax for this purpose and theoretically it has been argued that the compensation be funded out of an additional tax in the GST rather than by cess.

"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 would have to be imposed for the Central Government to get Rs 50,000 crore in order to fund the compensation," he said.

"50 per cent of the tax collected would go to the States as their GST share and of the balance 50 per cent in the hands of the Central Government and 42 per cent more would go to the States as devolution.

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

Alternatively, Jaitley said cesses can be imposed which would be subsumed in the taxes after five years.

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