The Centre could face the challenge of choosing between the consumers and filling its own coffers, once it clears the Goods and Services Tax (GST) loans.
With COVID-19 hitting economic activity and tax collections, the Centre had borrowed Rs 1.1 lakh crore in 2020-21 and Rs 1.59 lakh crore in 2021-22 to bridge the deficit in the GST compensation cess fund to ensure that states received the guaranteed 14 percent growth in their tax revenues under the new indirect tax regime.
While the five-year protected revenue period ended in June 2022, it was decided the cess would stay in place until March 2026 to help repay the loans.
But what happens starting April 2026, when the cess ceases to exist? Quite simply, prices of goods on which the cess is levied should reduce and become cheaper for consumers.
To be sure, the items on which the compensation cess is levied are considered sin or luxury goods and include tobacco products, soft drinks, and motor vehicles. For instance, SUVs attract a cess of 22 percent over and above the highest GST rate of 28 percent. After March 2026, these vehicles – and all other goods that attract compensation cess – should become cheaper.
However, according to a senior government official, the compensation cess could be reimagined after March 2026 to become an additional source of revenue. This would, of course, require legal amendments as the cess collected presently can only be used for one specific purpose: to compensate states.
“The compensation cess was imposed to ensure that the growth of GST in states should be 14 percent… After five years (from the implementation of GST in July 1, 2017), there is no such assurance. So it cannot be a compensation cess. It can be an additional revenue measure,” the official said.
A complex matter
Any such decision would ultimately have to be made by the GST Council and would require a constitutional amendment. And given how fractious the relationship between the Centre and certain states is when it comes to sharing tax revenues, the process would be far from smooth.
It must be remembered that cesses are not part of the divisible pool, and therefore, not shared with states.
“The need of the hour is to think ahead on how to repurpose and rename the compensation cess on tobacco, coal and fossil-fuelled transportation, as a Pigouvian levy on goods which generate negative health or climate externalities,” economist Indira Rajaraman noted in a newspaper column in August 2023.
A Pigouvian tax, named after famed British economist Arthur Cecil Pigou, is a tax on a transaction that creates a negative externality – an additional cost that must be borne by individuals not involved in the transaction. Tobacco and carbon taxes are two such examples.
“But the proceeds of such a (climate?) cess have to be put to the best use as judged by the excellent scholars working in India on climate action,” Rajaraman added.
In addition to letting the compensation cess end as scheduled or repurpose it, there is a third option: announcing an early end if the back-to-back loans are repaid early.
“March 31, 2026 is the sunset date for the cess. But it can be before that in case we are able to meet all the liabilities,” Revenue Secretary Sanjay Malhotra told Moneycontrol earlier this month after the presentation of the interim Budget.
“That is only a notification, it does not need any (legal) change,” Malhotra added.
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Undoubtedly, the matter of the compensation cess is not the most pressing one in front of the government and the GST Council; after all, they have nearly two years to mull it over. But given that GST related decisions can take time to be settled – the Group of Ministers on rate rationalisations is yet to finish its job despite being formed in September 2021 – an early resolution would be welcome.
Read more at: moneycontrol
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