The Sin of GST

Babuji aka Alok Nath is probably going crazy with bhajan kirtan right now-apparently the GST Council has soaked in his sanskars. The Government is set to introduce a ‘Sin’ Tax on alcohol and tobacco products to avert their consumption.

For those who are wondering what sin tax is, allow me to enlighten you (and showcase this recently acquired intel). ‘Sin tax’ is a globally prevalent practice in which products like alcohol and tobacco are taxed at higher rates as compared to other essential goods. Typically, ‘sin tax’ is an excise tax that is imposed on products and services considered to be bad for health or society such as alcohol, tobacco and gambling.

Taxes, in a nutshell, are a source of income for the government. ‘Sin Tax’ serves two for one. It is an effort to discourage people from using harmful products like cigarettes or bidis or services like gambling (because there’s nothing as precious as money, is there?). It also becomes one of the most common measures to shore up tax revenues. The logic is quite simple and taxpayers generally don’t oppose such a tax as they are indirect in nature and affect only their end users

 

In the current scheme of processes, the VAT on cigarettes is 25% in Maharashtra and 65% in Rajasthan. Bidis on the other hand are subjected to very low central and state taxes (under the falsepretext of protecting bidi rollers’ livelihood, the sources say). Unlike the current tax effects, the health effects are far more extensive. Many prominent ministers have been of the opinion that the tax on cigarettes, bidis and alcohol should be increased. Hence, the Sin Tax.

Here comes the glitch – the ideal behind GST is ‘one nation one tax’. If you think the GST Council is going to reduce the tax on these so called demerit goods, you’ll be stumped, just like when Trump was elected president, since the very same demerit goods earn a huge portion of the states’ revenue.

The council held a 13th meeting at the Capital (if this seems like a long time to legislate a law, it’ll boggle your mind to know that GST has been in the pipeline for 17 years). At the meeting the council capped the cess on demerit goods or so-called sin tax at 15%, the proceeds of which will be used to compensate states that may face a reduction in revenue once GST is in force. Jaitley clarified it would be levied in a manner such that the final tax incidence on such demerit items would not be lower than the existing tax rates. The cess is to be levied on tobacco, luxury cars, pan masala and aerated drinks.

The council also decided to cap the cess rate on tobacco products at Rs 4,170 per 1,000 sticks or 290% ad valorem. It also capped the cess on pan masala at 135% according to value (ad valorem). This cess would be levied on top of the GST to be imposed on these products.

So what if the motives of Sanskari Babuji and the GST Council are not exactly the same? For at least sometime post July 1, there will be a decline in the sale of bidis, cigarettes and alcohol, hopefully.