Demerit goods and GST compensation

Subject: Economy

Context:

A maximum of 15 per cent cess on GST rate of 28 per cent are levied on luxury goods and aerated drinks which will help create a corpus for compensating states for any loss of revenue from GST implementation

Concept:

• In economics, a demerit good is a good or service whose consumption is considered unhealthy, degrading, or otherwise socially undesirable due to the perceived negative effects on the consumers themselves.
• It is over-consumed if left to market forces. Examples of demerit goods include tobacco, alcoholic beverages, recreational drugs, gambling, junk food.
• Because of the nature of these goods, governments often levy taxes on these goods (specifically, sin taxes), in some cases regulating or banning consumption or advertisement of these goods.

Compensation cess

• Compensation cess was introduced as relief for States for the loss of revenues arising from the implementation of GST.
• States, in lieu of giving up their powers to collect taxes on goods and services after local levies were subsumed under the GST, were guaranteed a 14 per cent tax revenue growth in the first five years after GST implementation by the Central government.
• States’ tax revenue as of FY16 is considered as the base year for the calculation of this 14 per cent growth.
• Any shortfall against it is supposed to be compensated by the Centre using the funds specifically collected as compensation cess.
• Compensation cess is levied on five products considered to be ‘sin’ or luxury goods like SUV, pan masala, cigrattes.
• The collected compensation cess flows into the Consolidated Fund of India, and then transferred to the Public Account of India, where a GST compensation cess account has been created.
• States are compensated bi-monthly from the accumulated funds in this account.