The sumptuary tax however may require legal changes. It is for the GST Council and the government to work this out.
Currently, the GST is levied on a common base, with the Centre and states having a 50:50 share and defined administrative rights. Other indirect taxes, like central excise, Customs duty and state-level taxes like stamp duty, sales tax on petroleum products etc. are collected, administered and appropriated under different laws.
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Understanding the current tax structure
What is to be looked at is whether a GST-type system could be set up for the sumptuary levy as well, experts added. However, in this case, states may be given an added flexibility to keep a slightly higher rate than the floor prescribed.
The current tax incidence (GST plus cess) on sin items—tobacco, cigarettes and pan masala—varies widely – from 60-80% in some cases to as high as around 160-200%, for items like gutka.
Citing an example, Arbind Modi, tax expert, said: ‘The general principle is that excise duty should reflect the full cost of negative externalities. Therefore, if the cost of negative externalities is estimated at Rs 500 per litre of pure alcohol, the excise duty on a one-litre bottle of beer with 6% alcohol content should be Rs 30. Excise duties on other alcoholic beverages can then be determined on the same basis, thereby eliminating the need to prescribe separate rates for each type of alcohol.” The excise duty on other ‘sin’ goods should also be fixed accordingly, he added.
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Rastogi proposes an alternative
Abhishek Rastogi, founder at Rastogi Chambers and a GST expert, however, observed that such a special levy on sin goods may ultimately be merged into the GST pool, thereby enabling an equal sharing arrangement between the Centre and the States. “An alternative and more straightforward approach would be to ensure a direct 1:1 sharing ratio,” Rastogi added.
The finance ministry has sent a “holistic” proposal to a Group of Ministers on rate rationalisation, whereby the tax could have a 5% merit rate and a standard levy of 18%. Besides, a small number (five to seven) of sin and luxury items could be moved to a special rate of 40%, the higher threshold allowed under the current GST laws. The restructuring would also lead to the removal of the “compensation cess’ by December, given that cess proceeds to be collected by November would suffice to repay the loans taken to bridge a shortfall in the relevant kitty.
However, the Centre, in its proposal, has left open-ended the mechanisms of retaining tax incidence on sin goods, which sources said would be decided after discussion with the states. The Centre wants it to handle this comprehensively in cooperation with the states. Hence, it did not assume how sin items would be taxed over and above GST.