GST Council’s Tax Rate Rationalization Efforts

GST Council’s Tax Rate Rationalization Efforts

Sub : Economy

Sec: Fiscal Policy

Why in News

The Goods and Services Tax (GST) Council is currently reassessing tax rates for various items to ensure rationalization. This initiative has gained attention due to its delays caused by the COVID-19 pandemic and state elections. Union Finance Minister Nirmala Sitharaman emphasized the urgency of addressing this long-standing issue during a recent media interaction.

Current Focus: The GST Council is reviewing tax rates on a case-by-case basis for rationalization.

ABOUT GST COUNCIL

It is a constitutional body under Article 279A. It makes recommendations to the Union and State Government on issues related to Goods and Service Tax and was introduced by the Constitution (One Hundred and First Amendment) Act, 2016.

The GST Council is chaired by the Union Finance Minister and other members are the Union State Minister of Revenue or Finance and Ministers in-charge of Finance or Taxation of all the States.

It is considered as a federal body where both the centre and the states get due representation.

Every decision of the Goods and Services Tax Council shall be taken at a meeting by a majority of not less than three-fourths of the weighted votes of the members present and voting, in accordance with the following principles, namely:

the vote of the Central Government shall have a weightage of one third of the total votes cast, and

the votes of all the State Governments taken together shall have a weightage of two-thirds of the total votes cast, in that meeting

GST Council – is hailed for its cooperative federalism technology which brings together the Center and States and can be applied to many other policy reforms.

GST Compensation and Cess: The GST compensation scheme, which provided financial support to states, ceased on June 30, 2022, as mandated by law.

Continuing Cess: Discussions are ongoing regarding the necessity and conditions under which the compensation cess will remain in effect.

About 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, cigarettes.

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.

Constitutional Legitimacy

Union Government’s Authority: The Constitution empowers the Union government to levy cesses, which fund critical infrastructure projects, even though these funds are not shared directly with states.

Role of Cesses: The collected cesses are allocated for public goods such as roads, schools, ports, and hospitals, emphasizing their importance in national development.

What is Cess?

A cess is a tax on tax imposed by the central government for a specific purpose. It is levied until the required funds for that specific purpose are collected. For example, the education cess is used only for financing primary education.

Cess is an additional tax on the existing tax (e.g., 3% education cess on 30% personal income tax raises the total tax to 30.9%). Some cess, like the Swachh Bharat Cess, is imposed as a percentage of the total value (e.g., 0.5% on services).

The revenue collected from cess is credited to the Consolidated Fund of India (CFI) and used only for the specified purpose (e.g., fuel cess is used for the Central Road Fund).

Cess is not shared with state governments.