GST Council May Hike Cess On Luxury Cars To Help Disaster-Hit States

The GST Council may consider increasing the cess on luxury cars to raise funds to help states affected by natural calamities, a senior government official told BloombergQuint on condition of anonymity.

The proposal to hike the cess, subject to a ceiling of 25 percent, would be discussed in the meeting of Goods and Service Tax Council scheduled on Sept 28. Currently, the highest cess that the GST Council can impose on cars is 25 percent without an amendment to the GST (Compensation to States) Act. The current GST on cars is 28 percent.

Currently, a compensation cess of 20 percent is imposed on motor vehicles other than sports utility vehicles with engine capacity exceeding 1500cc, while a 22 percent cess is imposed on SUVs.

If not through the compensation cess, the GST Council may levy a cess on the value of cars. In that case, the current compensation cess would be kept at the same rate, the official cited earlier said.

Kerala witnessed its worst floods in nearly a century, leaving nearly 370 people dead and displacing around 12 lakh citizens. Estimates vary, but the state is said to have sustained economic losses to the tune of at least Rs 20,000 crore. Besides Kerala, Himachal Pradesh and Nagaland were also hit by floods.

How Can It Be Done?

Collections from the compensation cess—levied on demerit goods, or those whose consumption is considered unhealthy—is used to compensate states for the losses that they incur in first five years of the GST's rollout.

According to Article 279A (4) of the Constitution, the (GST) Council can make recommendations to the central government and states on “any special rates for raising additional resources during natural calamities/disasters, special provisions for certain States, etc”.

“If the government goes ahead with such a measure for Kerala flood relief, it may need to carefully evaluate the modality of its implementation such that it doesn't distort the overall GST structure and it's easy to implement for the industry," said Abhishek Jain, an indirect tax partner at EY India.

The GST Council may also discuss introducing a cess for helping states affected by natural calamities. This cess would solely be for helping disaster-hit states, said another government official.

Kerala Finance Minister Thomas Isaac tweeted that he had recently met Union Finance Minister Arun Jaitley to discuss imposing a cess on select items for a specified period.

“GST must be made flexible to accommodate an unforeseen urgent demand for resources as in the case of natural calamities,” Isaac tweeted after meeting Jaitley. “Kerala welcomes the suggestion of honourable FM for a national level cess on selected commodities for a specified period to help such states. GST Council to discuss.”

There is fear of an increase in smuggling if the cess on tobacco is hiked, a third official said, suggesting that the hike is unlikely.