Industry consultants are surprised that it will not be uniform, and fear this will make GST highly complicated

To ensure that the tax incidence on products like cigarettes, tobacco products and luxury commodities doesn’t decline under the GST regime, the Finance Ministry has proposed differential cess rates to be levied over and above the highest tax rate of 26 per cent for such products.

For instance, cigarettes, currently taxed at 53 per cent, could attract a cess rate of more than 100 per cent to bring the total GST levy on them in line with present taxation levels.

Cess calculation

“We want to keep the incidence of tax on these goods the same,” a senior Revenue Department official told The Hindu.

“So, if the current rate of taxation on a product is higher than the GST rate, then the cess will make up the difference.”

Finance Minister Arun Jaitley said on Wednesday that the cess over and above the 26 per cent GST rate would apply to “luxury items and tobacco products”. At the moment, the government levies a different rate of tax on items such as luxury cars, high-end watches, and tobacco products such as cigarettes, even though all are taxed at above 26 per cent.

“Cess on items presently being taxed at a rate higher than the highest proposed rate slab of 26 per cent shall be equal to the difference between the current tax incidence and higher tax slab of 26 per cent,” according to the agenda document for the third GST meeting, in possession of The Hindu.

This means that there will be a separate cess on each of these items, further complicating the GST tax structure under which the government has proposed six different tax rates ranging from zero to 26 per cent, including a four per cent tax on gold, to the GST Council. The council is tasked with finalising the rates and other modalities for the new indirect tax regime. It is meeting again on Thursday and Friday to negotiate the rates among other things, after the last round of talks failed, as the government scampers to meet its rollout deadline of April 1, 2017 for GST.

“When we heard the idea of a cess, we thought it would be a uniform cess. Now, if they want to have, say, six different cesses, it basically means 10 different rates of GST, which is not what it was meant to be. This will make GST very, very complicated,” M.S. Mani, Senior Director at Deloitte India told The Hindu.

“Cars are taxed on the basis of engine capacity, petrol or diesel, length of vehicle, and whether they are SUVs or not,” Mr. Mani pointed out. “This is complicated further at the State level. So, even if there is a separate cess on petrol cars above and below 1,200 cc, and diesel cars above and below the same, then that’s four cesses for cars alone!”

In the particular case of cigarettes, the cess is likely to exceed 100 per cent as the current incidence of tax (including VAT and excise duty) is at 53 per cent. Any cess of 100 per cent or lower will render cigarettes — classified as ‘sin’ or demerit goods —cheaper under the GST structure than they are currently.

As per the government's own calculations, shared in the council's last meeting agenda, the proposed GST rate structure would bring down prices of ‘pan, tobacco and intoxicants’ by 0.22 per cent. This category has a two per cent weightage in the Consumer Price Index.

Health expenditure

“There are 1 million deaths a year in India due to smoking alone, not counting chewing tobacco related deaths,” Bhavna Mukhopadhyay, Chief Executive,Voluntary Health Association of India, said. “The government spends more than Rs.1 lakh crore a year on the treatment of tobacco-related health issues. Making cigarettes and beedis cheaper would only worsen this situation.”

The government has said it would remove the cesses after five years, following which it will no longer need to compensate States for any losses in revenue due to the implementation of GST. This, however, is unlikely, according to Mr. Mani. “Historically, we are not good at abolishing cesses, but are very good at implementing them,” he said. “It would be just too much revenue for the Centre to do away with.”