Due to strong GST collection, GST compensation cess on selected products may end soon before March 2026 deadline

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GST compensation cess on selected product items may soon before March 2026 due to strong GST collections. India extends GST compensation cess levy till March 2026.

Products involved in the Compensation-

According to the officials with knowledge of the matter, GST compensation cess levied on products as automobiles, liquor, cigarettes, aerated water and coal could end earlier than the March 2026 deadline on the back of robust GST collections every month. States have been already given the entire provisionally admissible compensation amounting to Rs. 9.14 lakh crore for their revenue shortfalls in the transition period of 5 years ended June 2022, but the cess has been continued to retire the loan of Rs.2.69 lakh crore that was taken during the Covid pandemic for the purpose, they added on condition of being anonymous.

New Launch of New Indirect Tax-

During launch of the new indirect tax regime, GST law assures states of 14% enhancement in their annual revenue for the 5-year period from July 1, 2017 to June 30, 2022. The GST law also guaranteed to meet their revenue shortfall through a compensation cess levied on luxury goods.

The transformation period is already over and the centre has already paid the entire provisionally admissible compensation due to states. The cess continues until the Rs.2.69 lakh crore loans taken at the time of Covid to pay the compensation is fully repaid along with interest: the official with knowledge explained.

Strong GST Collections leads to Compensation Cess on Products ending before March 2026-

As GST collections are strong, the government expects to pay the entire debt ahead of March 31, 2026 deadline, expert said. GST revenues have seen a continuous uptrend later Covid since July 2021. The average monthly collection hiked to Rs.1.67 lakh crore in the first 11 months of fiscal year 2024 compared to Rs.1.50 lakh crore in fiscal year 2023 due to enhanced compliance and strong economic actions.

GST council recommended the apex decision making body on the indirect tax matters, the government issued a notification on June 24, 2022 to continue the cess beyond June 30, 2022. Collection of compensation cess is allowed only on account of repaying the principal and servicing the interest for the loan up to March 2026, or earlier if the loan obligation is fully met, another expert added. The centre borrowed and passed on Rs.1.1 lakh crore 2020-21 and Rs.1.59 lakh crore in 2021-22 to states to meet their revenue shortfall.

"While provisionally admissible compensation amount for assured 5-year tenure is fully paid the final compensation amount needs to be reconciled with audited figures. The money will be released immediately on the receipt of AG's certificate. But several states have not yet furnished the certificates."

As per the official data collected last month, AG certificates were pending for at least 3 financial years for Sikkim, West Bengal and Nagaland. For most other states, AG certificates were pending for April-June 2022, the officials said.

Karnataka is among the states that have submitted the certificate for each of the 5 financial years. Based on the certificate, a full compensation amount of Rs.1,06,258 crore was released to Karnataka for the 5 year transition period since July 1, 2017.

According to experts related to GST, while GST compensation cess may end earlier, the government may reconsider continuing higher duties on these items in few other form to fund government's green initiatives as reported by HT on Dec 19, 2022. GST cess on coal is Rs.400 per tonne. It has existed since 2010-11 and was initially termed a levy for the National Clean Energy and Environment Fund (NCEEF) before being subsumed into GST.


"The removal of GST compensation cess would make other products cheaper, unless GST Council decides," the expert added that any extension would be difficult as that would need endorsement by three- fourth majority of the weighted votes. The GST regime, different type of products attracts different cess rates. e.g.; 72% cess is levied on hookah tobacco, 290% on smoking mixture for pipes and cigarettes, 142% on chewing gutakha tobacco and 5% plus Rs.2,076 per thousand on filter cigarettes on length not exceeding 65 millimetres.

Pan masala attracts 60% cess, aerated water, lemonade and caffeinated beverages 12% and different types of motor vehicles from 1% to 22%. The 48th GST Council held in New Delhi on Dec 17, 2022 clarifies that a higher rate of compensation cess of 22% would be applicable to motor vehicle fulfilling all four conditions: if it is popularly known as SUV and has engine capacity exceeding 4,000 mm and a ground clearance of 170 mm or above.

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