Arun Jaitely explains rationale behind tax slabs & Cess under GST
Hon’ble Finance Minister, Arun Jaitley, explained the rationale behind the two important issues pending before the GST Council.
A. Multi Tax structure
Food items which constitute nearly 50% of Consumer Price Index basket should be exempt. The object of this is to ensure that the GST structure is not regressive or burdensome on the common man.
The principal rationale behind multiple tax slabs is that the items which are presently taxed at rates closer to the range of each of the slabs will be fitted into the particular rate of the slab. The slab under GST can be maintained as under:
| Present Tax Rate | Rate under GST |
| Item taxed below 3 percent | zero rate |
| Item taxed at 3.-9 percent | 6 percent |
| Item taxed at 9-15 percent | 12 percent |
| Item taxed at 27-31 percent | 26 percent |
Multiple tax rates in India are Inevitable and such multiple tax rates has been proposed due to following reasons:
• Different items used by different segments of society have to be taxed differently. Otherwise the GST would be regressive. Air Conditioner and Hawai Chappals cannot be taxed at the same rates.
• Total tax eventually collected has to be revenue neutral. The Government should not lose money nor make a windfall gain.
• The tax on some products in a narrow slab regime will substantially increase. This would be highly inflationary.
Further, the items which are now being used by the lower middle classes will eventually be proposed to be shifted to the 18% bracket.
B. Compensation Payable Through Cess
The Centre has to compensate the States for a period of 5 years as mandated in the Constitution. The GST Council has fixed a 14% revenue growth. The moot question is how this compensation should be funded for all the States and the revenue loss of a State has to be calculated on this basis.
Levying a cess would be a finest option to compensate States.
If the Central Government has to borrow money to fund the compensation, it would add to its liability and increase the cost of borrowing by the Centre, the State Governments and the private sector. If additional tax is levied it would create inflationary situation.
However, the Compensation can be funded through cess .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%. This would ensure no additional burden on the tax payer and yet be able to compensate the losing States.
Free Education Guide on Goods & Service Tax (GST)