Oct 19, 2016 10:14 PM IST | Source: CNBC-TV18

Cess on luxe goods to be a spoiler, defeats motive of GST: Pros

Sharing their views on the likely implementation of a cess on luxury goods to compensate the states for revenue loss, experts on the subject said cess defeats the purpose of the GST to subsume any other taxes and will prove to be a disappointment.

The second day of the Goods and Services Tax (GST) Council meet that concluded today turned out to be a non-event. Key decisions on the rate structure, cess, and dual-control on services will now be taken up again in next meet scheduled in the first week of November.

Sharing their views on the likely implementation of a cess on luxury goods to compensate the states for revenue loss, experts on the subject said cess defeats the purpose of the GST to subsume any other taxes and will prove to be a disappointment.

According to Pratik Jain of PricewaterhouseCoopers says it will lead to cascading of taxes and a higher rate in place of a cess would be better. "This is like taking one step forward and two steps backward," he says.

Mohandas Pai, Chairman of Manipal Global feels the government should rather create a separate kitty over and above the budgeted amount rather than implementing a cess.

“Multiplicity of rate is going to create a problem not only in administration but it may also lead to litigations as there will be classification issues,” says Nihal Kothari Executive Director, Khaitan & Co.

Hari Shankar of Ernst & Young and Sachin Menon of KPMG also shared their views.

Below is the verbatim transcript of panel discussion to Shereen Bhan on CNBC-TV18.

Q: Let me come to you first this is along the lines of what we have been reporting. No decision yet on the final rate structure, they are hoping to first get clarity on whether or not they should use the cess route for a compensation fund, but that is what it seems to be headed towards if you pick up on what the finance minister was saying?

Shankar: My first reaction is one more week to decide on thus is a good outcome. I would say that needs deliberation, but having said that you are right from what I have heard from the press conference sound bytes of the finance minister and appears that cess is still very much on the table. The question is the quantum and hence the sensitivity analysis of the revenue numbers to protect revenue.

My personal view is cess may not be a great idea, but that still very much on the table but the fact that they will have one more week to deliberate and think about is good, because then you will come with a little better outcome than otherwise what would have happen today, so we will have to wait and watch what happens on November 4 and 5, but cess is very much on the table.

Q: You were here with us last night as well and you now heard the finance minister, yesterday we heard the state finance ministers talking about the possibility of a cess being imposed and we understand the centre is likely to exercise its power under Article 271 to try and levy a cess. No final decision yet, but the rate structure will also depend on that possibility. Your first thoughts on what you heard so far?

Jain: I echo what Hari is saying and I think we are taking one step forward and two steps back. I don’t think cess is a good idea at all and there are multiple reasons and we have discussed some of that yesterday lead to cascading of tax. There is also I heard that the idea is that 26 percent and the difference between the existing rate would be the cess that would mean that different products will have cess at a different rate.

Right from 2009 the government has been saying that all cesses and surcharges will get subsumed and recently with the FAQ document was issued by the government that also said the same. So in that sense if the cess continues the industry will be very, very disappointed and I just hope that over next few days when they are taking time out and kind of discussing the rate structure again, when they come back they move away from cess and maybe look at increasing the 26 percent to let say 28 percent and 30 percent rather having the cess. Cess I don’t think is a good idea at all.

Q: How disappointed will industry be if that is the final decision to go through with the cess?

Pai: I think the cess is a very bad idea for a very simple reason it complicates the entire matter, 26 percent is a reasonable thing except for alcohol and cigarettes which may require a different thing. SUVs and so called luxury goods I don’t know what is luxury. Remember, we are a country when an AC was luxury at one point of time and a fridge was a luxury at one point of time.

The Government of India should take a bold step like Vijay Kelkar has said make a grand bargain, create a kitty of Rs 100,000 crore to borrowing over and above fiscal deficit and say we will compensate you, we will stand guarantee to the states for the next 5 years as per a compensation policy. Look at it for two years till everything settle down and then think of increasing any rates, because the most important thing today is to improve productivity in this country, reduce the multiple taxes and make sure industry gets the benefit and for two years if this means you have to borrow an additional Rs 200,000 crore, Rs 100,000 crore a year above the fiscal deficit you stand up and create a kitty and give it as a grand bargain. Why do the cess, why mess it up, why have multiplicity just to evade your responsibility.

Q: As you just heard the Kerala finance minister saying on the issue of compensation, there has been convergence because the finance minister has promised to find the money, where is the finance minister going to find the money from. Our sources tell us and these are highly placed sources that there is virtual consensus on the imposition of a cess to compensate states. Cess is a better mechanism of compensating states than an increase in tax rate that seems to be the government’s position?

Pai: I think the cess is a very bad idea. It is a substitute for tax you don’t know whether your collections will go up, collections will go up, everybody says it will go up by 1-2 percent of GDP. The fear of states not getting compensation is gone, because the constitutional guarantee and the finance minister my view should borrow more, create a kitty by borrowing. Why put a cess when you don’t know wait for a year. Industry should come on, industry should feel that costs are coming down, productivity will come the chain will be complete.

It will take 1 or 2 years for everything to play out to give you an idea what exactly is happening. By creating a cess, creating a multiplicity of everything else you are going to hurt industrial growth and the idea that this will not be passed on to consumers in a competitive environment is totally wrong. It will all be passed on to consumers. We can easily test it out over maybe 2 quarters, 3 quarters, 4 quarters. Let us take a bold measure simplify have as less then it is a possible, create a kitty. Give it to the states take a bold step. Keep it above the fiscal deficit and stop the cess business and don’t confuse the whole issue.

Q: Do you share the anxiety on the multiplicity of rate structures leading to more complication, perhaps even litigation and the tendency to push more items perhaps in the 26 percent bracket?

Menon: We are going backwards now. It is a retrograde step to undermine the credibility of GST which has been understood by the public so far. We are actually distorting the structure by bringing altogether unacceptable method of levying stress. We have said that under GST we will abolish all the cesses and then we are bringing new cess.

Q: What do you think has transpired because this was not the structure that was being discussed till even about a week or 10 days ago. Something seems to have changed over the past fortnight or so.

Menon: In my view the cess is not required because central government otherwise also will collect the money to compensate the state through increased collection of income tax.

Under the GST regime it is difficult for any business to operate without a registration, without disclosing any of the transaction or supply be it service or be it goods.

The ability to have any black economy is considerably going down and this means that government will collect more than what they require for compensating the states through the increased income tax collection.

So, therefore the justification to say that the cess is levied for the purpose of generating revenue perhaps may not be required, even otherwise government would collect more money.

By bringing this kind of new surprises you are rather undermining the trust of the people in GST and what is supposed to be the best tax system, we are distorting it and this may not go down well with the industry and the people.

Q: Remember 5 year is what the centre has guaranteed in terms of making good the revenue loss to states. How would you respond to that and we are also given to understand that perhaps Rs 26,000 crore that will come by way of the energy cess will also go towards compensating states?

Kothari: I think compensation has been already taken care of as far as the states are concerned and therefore the multiplicity of rates which is being contemplated is going to create a major problem in actual administration and also litigation because there will be a classification issues. Apart from that the whole objective of simplified tax structure will go away.

Therefore that multiplicity of rates should be avoided as far as possible and after about a year of deliberation in the empowered committee they came out with the first discussion paper where there were very clearly two rate structure and all states have agreed at that point in time also. Therefore, this multiplicity of rate is coming out of the fear or the government anxiety that there should be an inflationary impact at all and having a reference point of today’s rate structure without taking into account there will be increase in the revenue because the base will increase and also compliance will increase, but if you complicate the system by having multiple rate then even compliance will get affected, that is one major concern about these entire rate structure.

As far as cess is concerned if it is not actually coming into tradable cycle it means that it is not actually affecting the cascading effect of the tax and only at a final stage of like say sin goods or others then I don’t think it is going to make any material difference rather than having a multiple rate structure. That will be a better idea that but it should create a ways that there will be multiple cess later on.

Q: As we heard from both the Kerala finance minister as well as Mr Pandiarajan on the issue of dual control, there still is no clarity the Kerala finance minister seems to suggest that the model that is being proposed way too complicated and that is going to be a matter that will be addressed now in the next meeting in the first week of November. Beyond the rate structure on the issue of dual control what seems to be the best way forward?

Jain: I mentioned that yesterday that centre has a view that all the 11 lakh service tax asseesee will be administered by the centre to start with. As I suspected, the states are not too happy with that and there was a mention that state authorities in terms of numbers is much more than central authorities.

I think of the thing which Kerala finance minister also suggested that below Rs 1.5 crore of threshold maybe it can be given to states, but beyond Rs 1.5 crore of threshold I dual control is something is perhaps will have to live with and while for the service sector it is going to be a problem, but that’s the problem inherent with the GST structure, because when you talk about a dual GST you talk about dual administration as well.

From an industry point of view they would want one set of authorities and perhaps what they can consider doing is that while the assessment level can still be done separately by centre and state, but as we move ahead in terms of let say notices and appeals etc one can create a common platform between centre and state, so that can be adjudicated faster.

But to mind on dual control, I think the states will not give it up so easily so as to allow the centre to administer the entire service sector that I think is unlikely.

Q: Do you share that view that something seems to have changed over the past fortnight or so because this is not something that was being considered or at least we didn’t know that this was on the table and was being considered. Do you believe that this is now going to have serious implications and this will have a backlash from industry even though the revenue secretary speaking to our colleague has said that they are very confident of being able to achieve April 1 2017. However this is not going to go down well in its current avatar as is being talked about?

Shankar: Cess definitely will not go down well with the industry. I agree with you that cess was something which was not socialized among the general industry stakeholders.

Multiplicity of rate structure I think for some time we all knew there is going to be multiple rate structures. Even if you look at the CEA report it did allude to multiple rate structure. So, ideally you probably would not have wanted a multiple rate structure but multiple rate structure was at least a reality, we knew that there are going to be rates, we only did not know whether it is going to be 5 or 4 or 3 percent but that is a fact that was there on the table for some time. Cess was something which has been a surprise and the concept of cess being a delta between the current existing rate over and above the 26 percent was another factor, which mean for each item in that 26 percent rate, you might have different kinds of cesses.

Second, how will the cess apply? Will it lead to cascading, will it be at one part of the chain? These are all things which will vitiate the entire structure. You already have a multiple structure which means already our GST is going to be far more complicated than what had envisaged and then you add a cess to it, I don\\'t think the industry is going to be happy on the cess concept.

I was happy to hear Tamil Nadu finance minister say that this is only one of the options, which means I don\\'t think the jury is finally out on the cess. My hope is the one week of deliberation and the feedback they will get from the industry will make them see through as to whether cess is an ideal way to compensate or not.

I do agree to what Sachin Menon said, that the compensation is not going to a worry for the centre. They will have buoyancy in revenues through sheer compliance both in GST and income tax. So, I am a little surprised as to why cess is being projected as a compensatory vehicle. I am surprised to hear that.

Q: You heard our panellist, you heard the finance ministers, you heard the finance minister at the centre, you heard from the revenue secretary. Final words with you?

Kothari: I feel that the idea situation should be that only two rate structure and no cess, but we are hoping too much about that, so therefore to at least have a minimum rate structure is a better than actually just not levying the case, because cess will be only on few sin items that is what we could understand, but rather than having a tradable item which goes into supply chain and there if the rates are increased it will have more inflationary impact and also it will affect the demand for those goods and today you say luxury item is ex, tomorrow it may become a common item like say white goods are used in even the middle class and lower class people with the gas going to the villages. So if on that higher rate is levied that is much more worse than getting a cess on say tobacco product.

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