Millennium Post

GST Compensation Bill to detail revenue foregone by states

Government will introduce a bill in the winter session of Parliament beginning next week tabulating the revenue likely to be foregone by each state on account of subsuming of local taxes and the Centre’s contribution to make up for the loss.

The GST Compensation Bill will provide a legal backing to the Centre’s promise to compensate the states if their revenue growth rate falls below 14 per cent in the first five years of the GST roll out. The base year for calculating the revenue of a state has been decided as 2015-16.

“The compensation law would have the taxes subsumed and the revenue forgone by each state on account of GST implementation. It will give details on how the Centre plans to raise funds for compensating the revenue loss,” an official said.

A separate law will give the provisions a statutory backing and there will not be any case of any understanding error between the Centre and the states in future. The winter session of Parliament begins on November 16.

The officials of the central government will finalise the draft GST Compensation Law by November 15 and thereafter it would be circulated to the states. The GST Council in its meeting on November 24-25 will discuss the proposed law.

Goods and Services Tax (GST) will replace all indirect taxes on goods and services imposed by central and state governments.

The Centre and the states have converged to a four-tier GST tax structure of 5 per cent, 12 per cent, 18 per cent and 28 per cent and keeping out essential items out of the purview of the new taxation regime.

The Centre will, however, impose a cess on luxury items like high-end cars and demerit goods including tobacco, pan masala and aerated drinks, over and above the the highest 28 per cent.

Under the structure, the clean energy cess and cess on luxury items and demerit goods would be utilised to create a Rs 50,000 crore fund every year which will be utilised to compensate the states for first five years of GST roll out.

The official said the bill would also specify how much revenue is being raised from which item by way of levy of cess and also the way it is reimbursed to the states, thereby leaving no room for ambiguity.

Besides, it would also specify that at the end of five years if there is a surplus in the cess pool, in what proportion it should be decided between the Centre and the states, the official added.

“New GST structure likely to be non-inflationary,” Citigroup said in a research note, adding, “it appears that most of the items in the CPI basket will be taxed at a rate which is very close to their current levels”. According to Citigroup, even if some of the ‘services’ move to 18 per cent tax bracket (from 15 per cent), it is not likely to stroke inflationary consequences if the tax pass-through is smooth.

On the other hand, given that tax rates will be mostly unchanged, the positive growth impact will be felt only through better tax efficiency, the report added.

The report noted that the non-inflationary bias drove the GST rate consensus and bodes well for the introduction of new GST rates from April 1, 2017. 

GST: Aerated drink makers fume at being put in demerit list

Indian Beverage Association has expressed disappointment at the re-categorisation of aerated drinks under ‘demerit’ category in the GST rate slabs, saying at Rs 10 for 200 ml, such drinks are neither luxury goods nor do they pose health hazards.

“Aerated drinks are not ‘luxury’ goods. Aerated drinks cater to the average hydration needs of Indians in the form of immediately-available hygienic and safe drink source,” Indian Beverage Association (IBA) said in a statement. 

The association, which has major cola and other beverages makers such as Coca-Cola India, PepsiCo India and Red Bull India among others as members, said aerated drinks are also not ‘sin’ goods “as the Union Government itself had accepted the position by removing such goods from Schedule VII of the Finance Act, 2005 in the 2015-16 Budget”.

On the health issues linked to such drinks, IBA said: “There are observations by the court on the basis of the report of an expert panel that the ingredients present in aerated drinks do not pose any health hazard.”  

Last week, GST Council had announced that luxury items like high-end cars and demerit goods including tobacco, pan masala and aerated drinks, will be taxed at the highest rate of 28 per cent and would also attract a cess in a way that the total incidence of tax remains at almost the current level.

Expressing disappointment at the decision, IBA said, “At Rs 10 for 200 ml, aerated drinks are neither luxury goods nor do they carry the kind of health hazards attributed to them.” 

It further said the consumer base of aerated drinks ranges from the low to high income group and they are supplied even to rural villages and semi-urban places.

When the applicable tax rates on aerated drinks with abatement already stands at an effective 30-31 per cent, the IBA does not subscribe to the recommendation of an additional cess on aerated drinks over and above the 28 per cent GST rate, it added. 

Stating that food processing and aerated beverages have been one of the largest contributors to the FDI in the country, IBA hoped that it will not be “discriminated against in GST”. 
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