Finance Minister Arun Jaitley, in a blog post, explained the rationale behind the GST Council’s suggestion of four GST rates, writing that “air conditioners and hawai chappals cannot be taxed at the same rate.”
The decision to retain some cess, such as the clean energy cess and the tobacco cess was to make good Centre’s commitment to compensate states for any loss of revenue that may arise from the implementation of GST for the first five years, he wrote.
“Different items used by different segments of society have to be taxed differently,” Mr. Jaitley wrote in his blog post. “Otherwise the GST would be regressive. Air conditioners and hawai chappals cannot be taxed at the same rate. Total tax eventually collected has to be revenue neutral. “The tax on some products in a narrow slab regime will substantially increase,” the Finance Minister added. “This would be highly inflationary. A commodity being taxed by the Centre and the State at 11 per cent at present will be taxed at 12 per cent. If its taxation is suddenly raised on standard rate of 18 per cent,
Mr Jaitley also wrote that increasing direct taxes or the Centre’s debt in order to pay states’ the compensation for the first five years of GST implementation was not feasible.“Theoretically, it has been argued that the compensation be funded out of an additional tax in the GST rather than by cess,” he wrote.
“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 would have to be imposed for the Central Government to get Rs.50,000 crore in order to fund the compensation.”
“The alternative proposal is to have a cess account and continue same existing levies as cess for a period of five years before subsuming them as tax,” Mr. Jaitley wrote.“This would include clean energy cess and cesses on luxury items and tobacco products, which in any case, presently also pay levy higher than 26 per cent. This would ensure no additional burden on the tax payer and yet be able to compensate the losing states.”So far, the GST Council has met thrice and the Finance Minister said that two more meetings are proposed post-Diwali.