The Centre has turned down the proposal of the empowered group of state finance ministers to keep alcohol out of goods and services tax.  The government has in fact suggested that both alcohol and tobacco, which are demerit goods and considered harmful for health, should be kept under GST, with the states getting the power to levy excise duty over and above GST on alcohol. The Centre would have the same power in case of tobacco.

Currently, the Centre levies excise duty on tobacco products and the states levy tax on alcohol. The empowered group in its discussion paper on GST had proposed that tobacco products should be subjected to GST, but alcoholic beverages should be kept out of it, and sales tax or value added tax continued to be levied on it as per the existing practice. It said the Centre might be allowed to levy excise duty on tobacco products over and above GST without input tax credit.

“The government has sovereign powers to impose additional tax in case of demerit goods like tobacco and alcohol. The states have agreed to our suggestion of levying GST and additional tax on tobacco, but they want alcohol outside GST. We have suggested levying GST and additional tax on liquor as the Centre is doing in case of tobacco,” said a finance ministry official. Excise duty collections from tobacco products like cigarettes, bidis, chewing tobacco and gutkha stood at Rs 12,526 crore in 2008-09, compared with Rs 9,591 in 2007-08 and Rs 8,213 in 2006-07.

The Centre and the states have also agreed to keep octroi and local taxes out of GST. It has been decided to keep entertainment and luxury tax within GST, while no consensus has been reached on purchase tax and tax on natural gas. The empowered group has said that in case purchase tax has to be subsumed under GST, then adequate and continuing compensation should be provided to the states.

“Foodgrains producing states like Punjab and Haryana have said that they are getting substantial revenue from purchase tax and, thus, it should not be subsumed under GST, while most of the states and the central government are not in favour of giving any such exemption. Purchase tax is like sales tax, except that it is collected from the purchaser. If we do not subsume purchase tax in GST, tomorrow the states can impose it on other items and those will be out of GST,” the official added.

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