New Delhi: The goods and services tax (GST) Council will review only after five years the cess imposed on products like tobacco, aerated drinks and cars over and above the maximum 28% GST.

The cess, ranging from 1-290%, is meant to compensate state governments in the first five years of the new indirect tax regime for potential revenue losses from the 1 July switch-over to GST. “The GST Council at that point in time (five years later) will decide whether to abolish the cess or to make it part of the GST rate," a government official privy to the development said on condition of anonymity.

Industry experts say the cess should be dropped after five years, when the requirement for compensation no longer exists.

GST cess became a sensitive issue for businesses after the GST Council, chaired by finance minister Arun Jaitley, recommended to the central government on 5 August to move legislative amendments to raise the “maximum ceiling of cess leviable on motor vehicles to 25% instead of the present 15%." Cars other than small ones attract a 15% GST cess.

Car makers claim that raising the cess, which would lead to sharp price revision, will adversely impact the government’s ‘Make in India’ drive.

Also read: GST auto cess hike: Will carmakers’ party end before it began?

The central government, which is obliged to compensate states using proceeds of the cess, however, maintains that the Council’s recommendation is only to make an enabling provision in the law for an increase in the cess on cars to 25%, while the actual timing and extent of increase will be decided through broad-based consultations in the Council. The Council will meet again on 9 September.

“If anyone has any suggestion, one can write to the Council," said a second official, who also asked not to be named.

Tax experts say it will be wiser to wait a bit before revising the rates frequently when businesses are making a transition to the new tax system.

“It might have been better to first see how much loss, if any, is being incurred by the states before deciding to change the rates of the compensation cess," said Pratik Jain, partner and leader of the indirect tax practice at PwC India.

The provision for compensating states assumes that state indirect tax revenue from items covered under GST will grow at 14% per year and any shortfall will be met from proceeds of the cess.

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