Jaitley calls for cess on tobacco, luxury goods to compensate states for loss of revenue due to GST

Finance minister Arun Jaitley on Wednesday spoke in favour of levying a cess on tobacco and luxury products to compensate states for loss of revenue on GST saying the cost of funding through an additional tax would be “exorbitantly high and almost unbearable”.

The finance minister noted that 4-slab structure of 6, 12, 18 and 26 per cent was under consideration, with lower rates for essential commodities and higher bracket for luxury goods.

“Different items used by different segments of society have to be taxed differently. Otherwise the GST would be regressive. Air conditioners and hawai chappals cannot be taxed at the same rate. Total tax eventually collected has to be revenue neutral. The Government should not lose money necessary for expenditure nor make a windfall gain,” he wrote in a Facebook post.

On rationale for cess, Mr Jaitley said if the central government has to borrow money to fund states’ compensation, it would add to its liability and increase cost of borrowing for the Centre, state governments and the private sector.

He said there is no rationale for increasing direct tax for this purpose and theoretically it has been argued that the compensation be funded out of an additional tax in the GST rather than by cess.

Mr Jaitley said if cess is levied, states which benefit out of GST roll out do not have to compensate the losing states. “The Centre, as a non-beneficiary, has to compensate and the proposal for continuing existing cesses for five years to the extent of compensation required is the more benign way of compensating the losing states without burdening the tax payer,” he said.

— ARUN JAITLEY Union finance minister There will be a zero tax on such items(mainly food items). The object of this is to ensure that the GST structure is not regressive or burdensome on the common man