COMPENSATION CESS : WHAT A MESS

We all know that compensation cess has been introduced in GST with the sole objective of collecting revenue (not tax) in the form of a compensation cess to augment the resources to meet out any tax deficit which may be payable to states in the event of any State having a short fall of tax revenue in GST regime as per agreed formula. The likely hood of such shortfall was also estimated and accordingly compensation rates were decided, notified on select items as per the scheme of law.

All vehicles on which cess was notified, flat rate of 15 percent had been fixed which resulted in all vehicles getting cheaper in final price- some with small margin, others with reasonably higher margin. Such margins, by no stretch of imagination were abnormal or unreasonable.

Over a month into GST now, the same Government feels that the there is room for increasing the rate of cess on vehicles which have become cheaper than the earlier regime and  accordingly has decided to raise the rate of cess chargeable on select vehicles so that they do not result into prices which are lower than the earlier tax regime. Good for those who purchased in last few days.

Presently, cess is payable on vehicles @ 15% of their price, over and above the GST which is levied @ 28 percent. It is a fact that on GST introduction, prices of certain goods / commodities have gone up while in many other cases, it has come down and such rate fixation had been done with considerable discussions and after a lot of thought process was involved. Government has now have a afterthought that why should the prices be lowered on such items and therefore, come out with an idea that compensation cess should be enhanced from 15% to 25% (by 10%) on select vehicles (luxury and SUVs) so that prices such vehicles do not become cheaper than in the earlier taxation system.

We all know that after GST was introduced w.e.f. 1.7.2017, the overall tax incidence on motor vehicles come down as compared to the pre GST tax regime (see table below):

As a result of proposed increase of compensation cess by 10%, price of motor vehicles such as sports utility vehicles (SUV's) like Vitara Breeza, Creta, Ertigo, Scorpio, Innova, Fortuner  etc and luxury vehicles like Toyota, Mercedis Benz, BMW etc will go up by 10%. The vehicles whose prices and sales may be impacted may include motor vehicles with 10-13 persons seating capacity, mid segment / large cars, hybrid cars and SUVs.

While GST Council and the Central Government has all powers to do so, there are few questions to be addressed.

It was a Council's decisions taken with full conscience in meeting dated 18 May, 2017 that compensation shall be met as per the cesses decided. Then why to tinker so early only to see that lower prices are not desirable. Tinkering with rates so frequently would result in anarchy and unjust enrichment.

Does it not amount to profiteering on the part of Government which expects taxpayers to be just and fair to customers and has anti profiteering clause in place. Will such a decision shake the faith of trade & industry in the Government and its tax policies affecting sustainability and growth adversely resulting in trust deficit.

It is understood that this issue was discussed at 20^th meeting of GST Council held on  5 August, 2017 and final decision including the date of its implementation is expected to be taken in the next GST Council meeting dated to be held on 9^th September, 2017 at Hyderabad. This would, however, require an amendment in GST (Compensation to States)  Act, 2017 which may be done through an Ordinance.