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Luxury goods, 'demerit' items set to burn a hole in your pocket under GST

BS Web Team/New Delhi 17 Mar 17 | 11:37 AM


If you thought cost of living was going higher, brace yourself for even higher costs, especially if you like to consume what are referred to as luxury goods,

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Moving a step closer to implementing the goods and services tax, India’s most ambitious indirect tax reform, the GST Council, chaired by Union Finance Minister Arun Jaitley, on Thursday approved the drafts of the two remaining enabling laws — State GST and Union Territories GST.

The GST Council decided to cap the cess on luxury goods in GST at 15%, taking the GST rate to up to 43% for these items. So, beyond the highest GST slab of 28 per cent, aerated drinks, luxury cars and luxury goods could have an additional cess of up to 15 per cent.

"If a luxury car at present has 40 per cent total tax, under the new GST regime, there will be GST of 28 per cent plus a cess to keep the tax incidence level at the same level," said Jaitley.

The cess on pan masala had been capped at 135 per cent and that on tobacco was limited to 290 per cent, or Rs 4,170 per 1000 sticks, sources said.

Modi's concept of short-term pain, long-term gain

GST council's Thursday decision gels with Prime Minister Narendra Modi's notion of introducing policies that have long-term benefits for the people, even if it involves “short-term pain for long-term gain."

GST involves significant short-term pains -- inflationary pressures and higher prices could last a couple of years.

Cost of luxury items to sting

* The GST Council cleared the proposal to cap the cess on luxury cars and aerated drinks at 15 per cent over the peak rate of 28 per cent. The ceiling for the cess on 'sin' goods would be much higher.

* Finance Minister Arun Jaitley explained, luxury cars were taxed at 40 per cent at present. After GST is rolled out, luxury cars would be taxed at 28 per cent, and a cess of 12 per cent would be charged additionally. 

* Jaitley said the capping of cess was done at a higher rate only to give the GST Council more headroom in the future if there was a need to increase those.

However, Revenue Secretary Hasmukh Adhia said what they had cleared at the moment was the ceiling. "This means at this stage it would be difficult to assess which products would become expensive or cheap", he said.

Tobacco, environment cess

An official said the cap for pan masala would be 135 per cent. On tobacco and cigarettes, the cap would be 290 per cent, or Rs 4,170 per 1,000 cigarette sticks. A call has yet to be taken on whether or not a cess would be imposed on bidis. The cess on coal and lignite (environment cess) would have an upper limit at Rs 400 per tonne, the official said. 

However, the actual cess would be much lower — equal to the current indirect taxes on these goods. The cap would give headroom to the authorities to increase the cess in the future.

The Council also cleared a Union commerce department proposal for the nil rate to be applied for goods and services going to special economic zones.

The environment cess has been capped at Rs 400 per tonne. The actual cess on these items will be decided later, but the cap has been provided in the draft legislation.

The cess would be applicable for five years, the period for which the Centre has committed to compensating states for potential revenue losses. This period could be extended by the GST Council. At the same time, all other cesses would be subsumed into GST.

Market cheers cess cap on tobacco

Shares of cigarette companies shot up after the GST Council cleared the proposal to cap the cess on tobacco and cigarettes. ITC stock was the top gainer on the Sensex and Nifty. It added over 6% on both indices after the GST Council capped the cess on tobacco and cigarettes at 290% or Rs 4,170 per 1,000 cigarette sticks. 

Other cigarette stocks like Godfrey Phillips, VST Industries and Golden Tobacco also rallied up to 5% on BSE. ALSO READ: Cigarette shares gain on GST Council proposals; ITC up over 5%

GST rollout by July 1?

The GST Council hopes to roll out GST by July 1 this year. Jaitley said four of the Bills — state GST (SGST), Union Territory GST, and changes to the central GST, integrated GST and compensation legislation — cleared on Thursday would be taken to the Cabinet expeditiously. Then, these would be presented in Parliament. The SGST Bill would be taken up by the respective state Cabinets and Assemblies so that the GST could be rolled out from July. Jaitley said there would be a time buffer to prepare for the GST rollout, and July was a tentative date. ALSO READ: Stage set for July 1 rollout: GST Council caps cess on luxury goods at 15%

Next meeting of the GST Council is scheduled for March 31. In that meeting, rules will be fine tuned before the final discussion on how goods and services will fit in the four-tier tax slab structure of 5,12,18 and 28 per cent.

What are demerit or sin goods?

Often, readers wonder what demerit or sin goods are. As the name suggests, in economics, demerit goods are "goods or services whose consumption is considered unhealthy, degrading, or otherwise socially undesirable due to the perceived negative effects on consumers themselves". These are usually over-consumed if left to market forces.

Luxury goods

Luxury goods are goods for which demand increases more than proportionately as income rises, and is a contrast to a "necessity good", for which demand increases proportionately less than income. Luxury goods are often synonymous with superior goods and Veblen goods.

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