Demerit or sin goods Vs merit good

Subject: Economy

Concept:

Demerit or sin goods

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 and prostitution. 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.
GST on Sin/De-Merited Goods:The GST council also agreed to cap the cess on various so-called demerit (or sin and luxury) goods in the legislation. The cess on colas and cars has been capped at 15%, which means that the total tax incidence on sweetened drinks and cars cannot be more than 43% (tax rate of 28%+cess of 15%).
These cess rates are an enabling provision and the actual tax incidence could be lower, depending on the decision of the GST council.
The council has decided to bring in an enabling provision for levy of cess on all cars and not only on luxury cars.

Merit good

A merit good or service is something that adds to the welfare and well-being of society when it is produced and consumed.
A merit good, the production of which the Government will want to encourage. Demerit goods or services, in contrast, are those known to cause clear harm when produced and consumed. The GST Council has bracketed four items into this category — high end cars, pan masala, aerated drinks and tobacco products. Consuming pan masala and tobacco products have serious negative health implications, aerated drinks have low nutritional value and high end cars guzzle fuel and cause environmental harm. This is probably why these goods have been bracketed under demerit goods.
With four slabs in place (five, if you include the zero slab), the GST rates will depend on whether the government brackets them into the ‘merit’, ‘demerit’ or neutral category.
An essential ‘merit’ goods may get taxed at a GST of 0 or 5 per cent.
Most other goods and services will get taxed at standard rates of 12 or 18 per cent, and a items such as consumer durables (not expressly classified as ‘demerit’ goods) are likely to fall in the 28 per cent bracket.
However, the four specifically identified ‘demerit’ goods will be taxed at much higher rates than even the top GST slab of 28 per cent, with a cess being added on to the basic tax on these items.