The proposed structure of levying cess on ultra-luxury and sin goods is a departure from the GST concept as envisaged initially and the Centre would have absolute powers in future to alter the cess rate, which could go up to 2 per cent, experts said.

The GST Council yesterday mooted a four-slab GST tax structure of 6, 12, 18 and 26 per cent with lower rates for essential items and the highest for luxury goods that will also be levied with an additional cess.

"Cesses are being subsumed under GST and hence the levy of a new cess was a complete surprise. Proposal to have 5 rate structure is not aligned to the concept of simplified tax regime. Multiple slabs lead to complications on compliance and issues on classification," PwC Partner (Indirect Tax) Anita Rastogi said.

Last year, a panel headed by Chief Economic Advisor Arvind Subramanian had suggested 17-18 per cent as the standard rate for bulk of goods and services while recommending 12 per cent for low rate goods and 40 per cent for demerit ones like luxury car, aerated beverages, pan masala and tobacco. For precious metal, it recommended a range of 2-6 per cent.

Experts said that the incidence of cess is likely to be such that luxury goods would attract tax somewhere between 26 to 40 per cent.

"This cess that the Centre is talking about is likely to be non-creditable. Because the Centre wants to create a pool for compensation, the cess rate will likely come to between 1-2 per cent," Nangia & Co Director Rajat Mohan said.

Deloitte Haskins & Sells LLP Senior Director (Indirect Tax) M S Mani said that as a concept cess does not go well with the original idea of Goods and Services Tax (GST).

"Possibly they want to avoid a fifth tax slab and hence they brought the concept of cess. Cess would be helpful in a way that the rate of cess can be very easily altered whenever the Centre wants without consultation with state," Mani said.

As per the proposed GST rate structure, the Centre plans to create a ₹ 50,000 crore pool to be used to compensate the states for revenue loss arising out of implementation of GST.

The amount would be raised by imposing cess over and above the 26 per cent rate on ultra luxury and demerit goods such as tobacco, cigarettes, aerated drinks and polluting items.

As the cess would vary, experts said, it would be difficult to quantify how much would be the incidence of price increase in these items.

"Most demerit goods are currently taxed between 27-40 per cent. If the tax rate in GST is kept closer to that then the inflationary impact will be limited," Mani said.

The government plans to roll out GST from April 1, 2017.

It will subsume excise, service tax and other local levies.

Cess on demerit goods risks undermining GST simplicity by creating non creditable central levies and adjustable rates. The proposed imposition of a cess on ultra luxury and demerit goods departs from the original GST concept by creating an additional, potentially non creditable levy above the highest GST rate, enabling the Centre to vary the cess to build a compensation pool for states while affecting incidence, administration, and predictability of taxation on those goods.