Compensation-cess extension inevitable

The collections from the cess totalled roughly Rs 98,000 crore throughout 2018-19 and 2019-20, because the accompanying graphic reveals.

By MS Mani

When the GST Act was enacted, one of many said goals was to eradicate the a number of cesses and duties levied along with the prevailing oblique taxes. Whereas this goal was largely achieved, it was thought of essential to levy a compensation cess (cess), along with the GST, on sure items reminiscent of cars, cigarettes, paan masala, and so on. This levy was thought of essential to ascertain a fund pool that will compensate states for his or her income losses for a interval of 5 years (transition interval) after the introduction of GST.

Accordingly, the compensation cess was to be levied for a interval of 5 years after introduction of GST; the interval for the levy of the cess, because it exists now, is until June 30, 2022.

The collections from the cess totalled roughly Rs 98,000 crore throughout 2018-19 and 2019-20, because the accompanying graphic reveals.

It’s attention-grabbing to notice that the compensation cess per yr has been round Rs 1 lakh crore, besides in case of 2016-17 (the GST introduction yr) and 2020-21 (the pandemic yr).

Nonetheless, the components for compensating the states for income losses, by way of the Items and Providers Tax (Compensation to States) Act 2017 (CCA), doesn’t present any exceptions within the nature of a power majeure. Additional, part 3 of the CCA contemplated a projected progress fee of state tax revenues of 14%, contemplating the bottom yr as 2015-16.

The decline within the financial actions on account of the pandemic had led to vital decline within the GST and cess collections, resulting in a deficit within the compensation cess pool. The states’ tax revenues additionally declined considerably on account of the pandemic, and therefore the deficit that states have been going through widened in comparison with the previous. This led the Centre to take recourse to the borrowing route to maintain its dedication to fund states’ tax deficit with the understanding that compensation of the borrowings would entail a rise within the interval for which the cess could be levied.

A rise within the interval of the cess past June 2022 does now seem like inevitable, contemplating the wants of states, which have seen a decline of their tax revenues and a rise of their healthcare prices over the previous 18 months. Because the cess is levied by producers of sure merchandise and handed via the value-chain, it’s important to offer readability to those companies properly prematurely whether it is determined to proceed with the cess, in order that they’re properly ready to proceed levying the cess. It’s important to keep in mind that, along with the Centre and the states, the companies that cost, acquire and deposit the cess are key stakeholders whose views ought to be sought in any choice to increase the cess or alter the way of its levy.

Whereas elimination of the cess ought to be tried after a yr or two in order that it doesn’t change into an extra tax, as was prevalent previous to the introduction of GST in India, it’s essential to offer a transparent roadmap to impacted companies, properly prematurely.

The creator is Senior director, Deloitte India