In the blog post finance minister Arun Jaitley said, “Air conditioners and hawai chappals cannot be taxed at the same rate,” said a report in The Hindu.

 

The decision to retain some cess, such as the clean energy cess and the tobacco cess was to make good Centre’s commitment to compensate states for any loss of revenue that may arise from the implementation of GST for the first five years, he wrote.

 

“Different items used by different segments of society have to be taxed differently, otherwise the GST would be regressive. Air conditioners and hawai chappals cannot be taxed at the same rate. Total tax eventually collected has to be revenue neutral. The Government should not lose money necessary for expenditure nor make a windfall gain,” said the report.

 

“The tax on some products in a narrow slab regime will substantially increase,” the Finance Minister added. “This would be highly inflationary. A commodity being taxed by the Centre and the State at 11%  at present will be taxed at 12%.  If its taxation is suddenly raised on standard rate of 18%, it would disrupt the market and would be highly inflationary.”

 

Jaitley also wrote that increasing direct taxes or the Centre’s debt in order to pay states’ the compensation for the first five years of GST implementation was not feasible “Theoretically, it has been argued that the compensation be funded out of an additional tax in the GST rather than by cess,” he wrote.

 

“Assuming that the compensation is Rs 50,000 crore for the first year, the total tax impact of funding the compensation through a tax would be abnormally high. A Rs.1.72 lakh crore of tax would have to be imposed for the Central Government to get Rs.50,000 crore in order to fund the compensation.”