Govt may subsume cess on sin goods into GST

BENGALURU/NEW DELHI: The cess levied on aerated drinks, cigarettes and cars is set to become a bargaining chip in Centre-state talks on GST compensation, with the Centre offering to subsume a part of the levy into the GST rate after March 2026 to placate states, discussions within the government indicate. The Centre is likely to propose the cess, after giving some relief to the automobiles sector, be subsumed into GST after it expires in 2026, a suggestion that may please states worried about their financial position after June when the five-year compensation period ends. States are demanding that the Centre continue to compensate them for their revenue loss.

Subsuming the cess into GST will mean that the states will get half of the proceeds as state GST (SGST) in addition to getting 41% of the Centre’s GST collections, a person familiar with the development said on condition of anonymity.

The Centre does not see any merit in states’ demand for continued GST compensation beyond June, as it has no legal obligation to compensate states beyond the first five years of the indirect tax implementation. Second, a surge in GST collections means states may not require compensation, which is paid out of cess collection proceeds only when states face a revenue shortfall.

States have been pressing for the extension of GST compensation beyond June and are likely to take it up in the next GST Council meeting.

“The cess component charged today may get subsumed within GST. While a decision has not been taken on this, there is no reason why we should allow cigarettes or aerated drinks to continue at the same rate as non-sin goods,” the person said.

The person added that states would gain more if they get a share of higher taxes on these items than continuing to get compensation, which they will get only in case of a revenue shortfall. “GST revenues are at a record high now, much higher than budget estimates and revised estimates. States may not even require compensation,” the person added. The states are given full compensation for the first five years of introduction of GST on the assumed revenue growth rate of 14% over the base year of 2015-16. To be sure, it isn’t clear whether states would agree to the suggestion, given the government’s term will be over in 2024, and a new finance commission will guide Centre-state fiscal relations after 2026.

Compensation cess is levied on luxury and sin items such as aerated drinks, coal, pan masala, cigarettes and automobiles over the peak GST rate of 28%. The cess on cars goes up to 22% and is 12% for aerated drinks.

The compensation cess collection is estimated at ₹1.2 lakh crore in 2022-23. If the Centre’s formula is applied to this, ₹84,000 crore of this could go to states if they accept the proposal. The amount is likely to go up further in subsequent years. Experts, however, see some practical difficulties.