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Finance

GST Council likely to consider hiking cess on sin goods, amongst other options to garner funds for states' compensation

Updated : August 11, 2020 07:29 PM IST

According to the current GST rate structure, some of the sin goods that attract a cess include cigarettes, pan masala and aerated drinks.

Meanwhile, apart from the proposal to hike cess, the other options which could be considered by the council includes the idea of market borrowing.

The upcoming GST Council, which shall meet on only single point agenda, anytime in August, to iron out measures to meet the compensation requirements, is likely to discuss three top suggestions to raise compensation funds.

"The council is likely to discuss the proposal sent by some states on hiking the cess percentage on sin goods. Some of the states that have given this suggestion includes, Punjab, Chattisgarh, Bihar, Goa, Delhi, among others," sources privy to the developments told CNBC-TV18.

According to the current GST rate structure, some of the sin goods that attract a cess include cigarettes, pan masala and aerated drinks. Apart from sin goods, luxury products like cars also attract a cess.

Also read: The compensation challenge in the GST regime

Currently, pan masala attracts 100 percent cess and the upper ceiling as per the cess rules to which the cess rate can be hiked is 130 percent, implying that the GST Council, if it decides, can hike the cess rate on pan masala by another 30 percent.

Similarly, aerated drinks attract a cess of 12 percent and the maximum limit permissible in the law is 15 percent, so if the council decides, another 3 percent cess can be added.

For cigarettes, the maximum possible cess that can be levied is 290 percent ad valorem plus Rs 4,170 per thousand sticks. Currently, not all categories of cigarettes attract Rs 4,170 per thousand sticks additional burden and this is levied on the quantity front, only one specific kind of cigarettes. In terms of cess percentage, a maximum of only 36 percent cess is what cigarettes attract as of now.

Also read: Explained: The impact of GST inverted duty structure on a business

Implying that the GST Council has a window of 254 percent additional cess that can be levied. However, it is unprecedented that the council increases the cess percentage on any item to the maximum possible limit in one go.

Meanwhile, apart from the proposal to hike cess, the other options which could be considered by the council includes the idea of market borrowing. But sources in the know told CNBC-TV18 that the Centre is likely to suggest states to borrow to meet the GST shortfall and on the other hand, states are likely to ask Centre to borrow to compensate the states.

This idea has been discussed by the council already twice, but no concrete decision has emerged as both Centre and states have raised serious reservations.

This apart, the third possible option, which the Centre is likely to discuss is how states and Centre can relook and go in for serious measures for better and efficient revenue realization.

Also read: Row over GST compensation shortfall likely to continue; states may face pressure from Centre to find solution

An example of this was seen recently, when the Delhi government had sent notices to 5,584 companies under GSTR Act 3A for not filing tax returns and Value Added Tax notices to 36 companies for not filing tax returns.

In its press release, the Delhi government said it was working to increase revenue for development works and also anti-COVID measures, "During the review process, it was found that 10800 companies registered under GST have either paid no tax or paid lesser tax to the Delhi government in the last quarter," adding that action had been initiated against these companies.

According to Manish Sisodia, deputy chief minister and finance minister, nine sectors namely auto, electronics, e-commerce, insurance, pharma, financial services, consulting, security and healthcare had not been affected by the COVID-19 pandemic.

Also read: Delhi govt sends notices to 5,584 cos for not filing GST returns

Sisodia has written to the GST department that around 935 companies under these nine sectors have paid zero tax and 2,017 companies have paid 50 percent tax. He said the Delhi government will strictly scrutinize the reasons behind not filing tax returns by these companies from unaffected sectors.

He has asked the companies to immediately deposit the taxes and warned of stringent action against the companies which failed to do so.

Thus, Centre feels, similar exercise can be conducted by all states, individually which can help in augmenting state revenue collections, which can help reduce the burden on the compensation requirements.

It is now to be seen when the council meets and what is the final decision on the measures to be adopted to help tide over the entire issue of lack of funds to meet the promised compensation requirements.

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