Cess on that fancy car may go, but prices won't budge. Here's why.

Mint

18 hours ago

After eight years of piggybacking on India's goods and services tax (GST), the compensation cess levied on sin goods and luxury items may be finally integrated into GST levied on these items.
According to two people familiar with discussions in the GST Council, the Union finance ministry is willing to integrate the cess on items like cars, tobacco and aerated drinks into their GST rates. The cess, levied on top of the GST rate, was originally intended to compensate states for potential revenue loss due to the transition to GST. In 2022, it was extended till March 2026 to repay central loans taken to support states during the pandemic.
'The central government backs the integration of the compensation cess into the GST rate structure, which will help boost states' revenue receipts," said the person quoted above.
Collection of the cess, which is expected to fetch ₹1.67 trillion this year, ends in March.
If the cess is integrated into GST, it will have no effect on the consumer; for eg., an SUV of certain specifications, which currently attracts 22% cess in addition to 28% GST, will have a higher GST rate.
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However, under GST, the Centre and states collect taxes equally as central GST (CGST) and state GST (SGST). While the states get to keep all of the SGST, the Centre shares a significant portion of its collection with the states. If the cess is integrated into GST, some of it comes back to the states, under a tax-sharing formula set by the Finance Commission.
At present, the Centre shares 41% of its tax revenue to the states. In October, the Sixteenth Finance Commission (SFC) led by Arvind Panagariya is expected to recommend the formula for the next five years starting FY27. If the GST Council decision on compensation cess is not ready by the time SFC finalizes its report, the Centre may give SFC more time to accommodate the Council's decision once it is made, the second person quoted above said.
12%
The Centre is also prepared to eliminate the 12% GST slab and move the bulk of the items in the bracket to 5% to simplify the GST rate structure and benefit consumers, the person cited earlier said, addin state governments need to be on board as it would mean a seven percentage point reduction on the tax rate on these items.
'The central government is prepared to eliminate the 12% slab and as its fiscal position is robust and stable. It remains to be seen if all the states will back the proposal, particularly, those with stretched public finances," added the person.
Queries emailed on Friday to the finance ministry and to the GST Council Secretariat seeking comments remained unanswered at press time.
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The GST Council chaired by union finance minister Nirmala Sitharaman is expected meet either in the third week of July or after the monsoon session of Parliament to discuss these proposals.
The 12% GST slab represents intermediate items which represent less than luxury but more than mass consumption items and include products like cheese, sugar-boiled confectionary, preserved fish, beverages containing milk, apparel priced above ₹1,000 a piece, footwear priced up to ₹1,000 a pair, bricks and clean energy devices. This basket is smaller than the 18% slab comprising manufactured products, but bigger than the 5% slab consisting of mass use items and 28% slab covering items like cars, cigarettes and aerated drinks.
The move to eliminate the 12% slab and simplify the tax framework into a three-rate structure of 5%, 18% and 28% marks a strategic and significant step, said Prabhat Ranjan, senior director, indirect taxation at Nexdigm, a business advisory firm.
'It is expected to reduce classification ambiguities, streamline compliance, and enhance overall transparency and clarity within the GST regime. It is consistent with global benchmarks, enhancing tax governance and fostering a more stable and predictable business climate," said Ranjan.
'For consumers, the migration of goods to the 5% bracket could translate into lower prices on several essential and widely used products, thereby improving affordability and stimulating consumption across income segments. This is particularly relevant in the current macroeconomic context, where sustaining demand and managing inflation are key policy objectives," said Ranjan.
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On the other hand, goods moving into the 18% bracket may experience moderate price increases, which could impact consumer sentiment in specific categories, he said.
Currently, pharmaceutical products that are essential and life-saving are either exempt from GST or are under the 5% GST rate bracket. Those other than life-saving drugs are currently classified under 12% GST rate bracket. Government should redistribute such essential products from 12% rate bracket to 5% rate bracket only, Ranjan added.
State side
'While the Centre's stable revenues support this move, fiscally weaker states may resist due to potential revenue loss. Historically, such cuts have been offset by higher taxes on sin goods like tobacco, pan masala, and cigarettes. A similar balancing act may be necessary to gain consensus within the GST Council," said Rajat Mohan, senior partner at AMRG & Associates.
At the GST Council meeting, discussions are likely to deepen not only on rate rationalization but also on broader structural priorities, including the operationalization of GST appellate tribunals, phased implementation of the invoice management system, and regulatory clarity on complex sectors such as online gaming, insurance, and real estate, Mohan said about expectations from the meeting.
'The Council will be tasked with striking a delicate balance—simplifying compliance frameworks, safeguarding revenue neutrality, and addressing the diverse fiscal realities of both developed and revenue-constrained states," added Mohan.
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