Dashed Hopes

When the Goods and Services Tax (GST) was conceived and debated, the objective was to end the multiple layers of taxation at the central and state government levels, curb tax avoidance, and bring down the tax rates to moderate levels. But that seems like a distant dream, going by the deliberations in the GST Council.

After putting an enabling clause in the law to increase the peak GST rate to 40 per cent from the proposed 28 per cent, the council has now proposed a maximum compensation cess of 15 per cent which would be levied on the total taxable price of the goods and services, and not just on the tax, as is the case with Education Cess.

The proposed cess, also called sin tax, is likely to be levied on demerit and luxury goods such as aerated drinks and luxury cars, only for the first five years. However, government sources hint that the cess could be extended beyond this time period. The funds collected through the cess would be used to compensate states for the losses incurred by them due to the implementation of GST. The states would be fully compensated for losses in the first five years.

While tax experts and analysts have welcomed the announcement of 15 per cent cap on the cess, bringing in much-needed certainty, not many of them are encouraged by the signals that the government and the GST Council have been sending with regard to the tax rates.

Though the expectation is that the cess would be levied only on luxury and demerit goods, the law on compensation cess does not clearly state that it won't be levied on any other goods. That in itself is a bit of a worry for the industry.

Besides, the government is yet to define luxury goods. Would a Honda City car be categorised as a luxury item or would only cars and automobiles priced over Rs 25 lakh be labelled as luxury items - there is still no clarity on this.

There is already speculation that the inclusion of the enabling provision in the GST law to increase the peak rate from 28 per cent to 40 per cent was done with the intention of increasing the peak rate as soon as the compensation cess ceases to exist after the first five years.

May be apt to say that the developments in the past six months have pointed to a rather unfavourable GST regime.

@Dipak_Journo