Will A Cess Make GST Meaningless?
Cess raj may make a comeback under GST regime; experts say it’s a retrograde step.
There was no finality on the Goods and Services Tax (GST) rate at the end of the second day of GST Council’s scheduled three-day meet. And pinning hopes on any announcement on this front on Thursday won’t be useful either. The Council has cut short its meeting and will now huddle next on November 3.
In the media briefing, finance minister Arun Jaitley elaborated on the discussions that consumed a better part of the Council’s day. He said that the GST Council has nearly converged on the source of funds to compensate states for loss of revenue under the GST regime. Only once the source of funds has been finalised, will the GST rate structure be decided, he added.
While the finance minister didn’t elaborate on what the source of these funds could be, Revenue Secretary Hasmukh Adia said after the press briefing that “the funding mechanism for compensating states, whether by a way of higher tax or by a cess will have to be discussed and decided.”
Kerala Finance Minister Thomas Isaac confirmed to BloombergQuint that the suggestion was to put a cess on tobacco, aerated drinks, luxury cars and so on.
The proposed cesses will earn some Rs 44,000 crore and government will require an additional Rs 7,000 crore after proposed cesses to meet compensation.Thomas Isaac, Finance Minister, Kerala
But experts differ.
In an interview to BloombergQuint, Sachin Menon, indirect tax leader at KPMG said that this concept of revenue deficit may be a myth.
If GST is implemented properly, there may not be a deficit in the hands of any of the states. This is a presumption that there will be a deficit and so there has be to a way to finance this deficit. If you look at the economic analysis, nobody has said that there will be a deficit in revenue collection.Sachin Menon, Indirect Tax Leader, KPMG
Rather than impose a cess starting day one of GST, the government can assess if indeed there is a deficit in the first couple of years of GST implementation and then decide if it is required, Sachin suggested.
He also proposed other means of funding the revenue loss, should it arise under the GST regime.
The central government can finance it from their own funds or even borrowed funds for that matter for such a large reform like GST. Cess will be a retrograde step.Sachin Menon, Indirect Tax Leader, KPMG
A cess is simply not in line with the GST principle, Sachin said, outlining the issues that may emanate from its imposition.
The devil will be in the detail. We don’t know if it’ll be a last-point levy or a multi-point levy. If it is a multi-point levy and there is no set-off mechanism, it will have a cascading effect on the GST structure which was one of the positive effects of this regime and you’re now compromising that.Sachin Menon, Indirect Tax Leader, KPMG
The discussions on dual control between the Centre and states is more of a territory war, he added.
Earlier, the understanding was that below Rs 1.5 crore of annual turnover, there will single control by state authorities. In numbers, this would amount to more than 50% of dealers. Also, the earlier decision was that Centre would continue to have control over existing service tax assessees which may not be agreeable to the states now. So then why should states get exclusive control of assessees below Rs 1.5 crore- so this seems to be the contention.Sachin Menon, Indirect Tax Leader, KPMG
The issues related to source of funds, GST rate structure and dual control are likely to be taken up by the GST Council on November 3-4. Thereafter, the GST Council is tentatively scheduled to meet on November 9-10 when the Draft Model GST Law will be taken up.
Watch the accompanying video for the full interview.