Hurting the GST regime with cess
Hindustan Times reported on Monday that the next GST Council meeting is expected to consider a proposal to add two new cesses — one for health and the other for clean energy. To be sure, the proposed cesses are unlikely to lead to a hike in tax rates because they will come into effect after the existing compensation cess is done away with; the two cesses will replace the latter. While details are awaited, the idea is not very inspiring, at least in principle. Here are three reasons why.
The compensation cess was a political rather than a macroeconomic imperative. The Union government assured the states of a guaranteed 14% growth in their pre-GST revenues until July 2022 to get them to accept the rollout of GST. The compensation cess was expected to fund this guarantee. It was extended beyond 2022 to pay back the debt that was incurred to fund the shortfall because of the pandemic's impact. Once these debts are paid off, a GST cess is not needed.
The proposed new cesses, if imposed, will be among the many that add to the tax burden in the name of various objectives. In this case, it is going to be health and clean energy. Because the cesses are going to be levied on so-called sin and luxury goods, it is nothing but another tax slab from the back door. The GST regime was sold as a simple indirect tax regime with just two or three slabs. What it looks like today is anything but simple, and there is an urgent need to simplify it rather than make it more complex.
What we also do not know at the moment is whether this cess will accrue to the Centre alone or the states will also get a part of it. Given the fact that states are also represented in the GST Council, any cess which accrues exclusively to the Centre is unlikely to find much traction. If both the Centre and the states are going to share the spoils, will the division be on the lines of the latter's SGST collections or the formula for division of central taxes among states? And, will this require an amendment in the law?
Reforming GST, in the true sense of the term, needs acknowledging a larger problem. Lip service to reforms and the temptation for raising revenue collections from complicated tax regimes that make business more difficult cannot co-exist.
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