Industry chamber Assocham has made a pitch to Finance Minister Arun Jaitley against levying cess, but to hike the proposed Goods and Services Tax by 1-2 per cent to compensate states for revenue loss under the GST system.
"The idea of levying cess to make a corpus for compensation to states does not seem to be feasible. The additional revenue required for such compensation can be collected by increasing the tax rates (by 1-2 percent) instead of levying the cess," Assocham Secretary General D.S. Rawat said in a letter written last week to Jaitley.
The next meeting of the GST Council, chaired by Mr Jaitley, is slated for November 3-4.
On the crucial issue of the tax rate structure, which three earlier meetings of the GST Council failed to decide, Mr Jaitley has said that a four-slab structure of 6, 12, 18 and 26 per cent is under consideration, with lower rates for essential commodities and higher ones for luxury goods.
It has been proposed that items constituting nearly 50 per cent of the weightage in the Consumer Price Index basket, mostly food items, be exempted from the levy.
Besides, a cess is also likely to be levied on demerit or sin goods and polluting items.
The industry body Assocham suggested that essential commodities of mass consumption like fruit, vegetables and grains should not be taxed, while processed food products like dairy products, rice, edible oil and biscuits should attract six per cent duty.
It said mobile phones, computers, fruit juices, pet foods should be taxed at 12 per cent and other items at 18 per cent.
Luxury cars, tobacco and pan masala should be taxed at 26 per cent, Assocham added.
Mr Jaitley suggested last week that in order to compensate states for loss of revenue in the GST regime, a cess on tobacco and luxury goods is an option preferable over additional tax, which will be exorbitantly high.
"Assuming that the compensation is Rs 50,000 crore for the first year, the total tax impact of funding the compensation through a tax would be abnormally high. A Rs 1.72 lakh crore of tax will have to be imposed for the central government to get Rs 50,000 crore in order to fund the compensation," Mr Jaitley wrote in a Facebook post.
"Fifty per cent of the tax collected will go to the states as their GST share and of the balance 50 per cent in the hands of the Centre, 42 per cent more will go to the states as devolution."
"So, out of every 100 rupees collected under the GST system, only 29 per cent remains with the Centre. The tax impact of this levy will be exorbitantly high and almost unbearable," he said.
"Different items used by different segments of society have to be taxed differently. Otherwise, the GST will be regressive. Air conditioners and hawai chappals (flip-flops) 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 added.
Mr Jaitley proposed, instead, imposing cess, which would be subsumed in the taxes after five years.
"This will include cess on clean energy, luxury items and tobacco products, which in any case presently also pay levy higher than 26 per cent. This will ensure no additional burden on the taxpayer and yet be able to compensate the losing states," he said.
The Finance Minister said if cess is levied, the states which benefit from the GST will not have to compensate the losing states.