GoM on GST Compensation Cess Considers Merger with Goods and Services Tax

The group of ministers (GoM) on GST compensation cess, led by Minister of State for Finance Pankaj Chaudhary, recently deliberated on integrating the compensation cess into the GST framework. During this meeting, states revisited discussions from the 7th GST Council meeting held on December 22-23, 2016. At that time, former Union Finance Minister Arun Jaitley had suggested merging the compensation cess with the tax after the five-year levy period concluded.

Representative image

Before the Goods and Services Tax (GST) was implemented on July 1, 2017, both the Centre and states agreed to impose a cess on certain luxury, sin, and demerit goods in addition to the 28% tax rate. This compensation cess aimed to offset states' revenue losses following GST implementation for a five-year span. According to minutes from the 7th GST Council meeting, Jaitley mentioned that previous meetings had explored various funding mechanisms for compensation.

Compensation Cess and Future Considerations

Jaitley noted that the chosen approach was least burdensome for consumers: collecting cess on specific luxury and demerit goods exceeding a 28% tax. After five years, this cess could merge with the tax. Sources indicated that states proposed no new goods be added to the luxury, sin, and demerit categories once merging decisions are made.

States believe that since the compensation cess concludes in March 2026, merging it with taxes is the only viable restructuring option. This would involve establishing separate tax rates for items currently subject to cess. After the meeting, Chaudhary stated that all states shared their perspectives and that the GoM would reconvene in November's second week.

States' Views and Future Discussions

Chaudhary highlighted that discussions are ongoing regarding whether to continue as a cess or convert it into a tax. Changes in luxury, demerit, and sin goods items are also under consideration. Sources revealed that all states advocate for merging taxes under GST since the compensation cess has expired. However, they insist no new goods should be added.

The GoM comprises members from Assam, Chhattisgarh, Gujarat, Karnataka, Madhya Pradesh, Punjab, Tamil Nadu, Uttar Pradesh, and West Bengal. They must submit their report to the GST Council by December 31. In the GST regime, compensation cess at varied rates is levied on luxury, sin, and demerit goods over and above the 28% tax.

Compensation Cess Extension and Loan Repayment

Initially planned for five years post-GST rollout or until June 2022, proceeds from this cess compensated states for revenue losses incurred after GST introduction. In 2022, the Council extended this levy until March 2026 to repay interest and principal amounts of a Rs 2.69 lakh crore loan taken during fiscal years 2021 and 2022 to cover states' revenue losses during COVID-19.

With just over a year left before the cess ends, the GST Council decided in its 54th meeting on September 9 to establish a GoM to determine its future course. The GoM's task is crucial as it will shape how these funds are managed moving forward while ensuring equitable distribution between Centre and states.