GST debate: Cess on sin, luxury goods won't be inflationary, says Jaitley

If luxury cars have 40% indirect tax incidence, a cess of 12% would be imposed over peak rate of 28%

Finance minister Arun Jaitley on Wednesday defended a decision by the GST (goods and services tax) Council to impose a cess on sin and luxury goods over the peak rate of 28 per cent instead of a higher tax to compensate states for the revenue loss in the first five years of the rollout of the new indirect tax system. 

Initiating a debate on four GST Bills — Central GST, Union Territory GST, Integrated GST and Compensation — in the Lok Sabha, Jaitley also cautioned the house that there should not be many changes in the Bills since the new indirect taxation system is unique, dealing with shared powers between the states and the Centre. 

He said had the peak rate been raised instead of imposing a cess on luxury and sin goods such as big cars, aerated drinks, coal, tobacco, it would have an inflationary effect. 

Explaining, Jaitley said for a compensation amount of Rs 50,000 crore to states, a tax of Rs 1,72,000 crore would have to be imposed. This is because half of the tax would have gone to states and 42 per cent of Rs 86,000 crore would also be transferred to states, following 42 per cent devolution after the 14th finance commission's recommendation.

However, under the arrangement, the cess would be imposed only till the point of current taxation level. If luxury cars have 40 per cent indirect tax incidence, a cess of 12 per cent would be imposed over 28 per cent. 

Jaitley said GST is a unique experiment in the federal structure. For the first time, a federal body — the GST Council — has been created. 

As such, if there are many changes by Parliament or state legislatures to the GST Bills, it would become difficult to implement GST.

So, if there are concrete suggestions, he could go as representative of Parliament to the GST Council to accept those changes, he said. 

The Lok Sabha is likely to approve the Bills on Wednesday itself. Being money Bills, the Rajya Sabha does not have the power to make any changes to these legislations as approved by the Lok Sabha. However, the upper house can recommend changes. 

The GST Council next will take up rules on March 31 after which a committee of officers will take up the task of fixing item-wise rates. 

State GST Bills will have to be passed by respective state assemblies. 

GST is slated to be rolled out from July, even as the industry is seeking a two-month deferment.