GST Council forms GoM on compensation cess; report expected by Dec 31

The Goods and Services Tax (GST) Council has set up a 10-member GoM, chaired by Minister of State for Finance Pankaj Chaudhary, to decide on the taxation of luxury, sin and demerit goods once the compensation cess ends in March 2026.

The Group of Ministers (GoM), which includes members from Assam, Chhattisgarh, Gujarat, Karnataka, Madhya Pradesh, Punjab, Tamil Nadu, Uttar Pradesh and West Bengal, will submit its report to the 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 per cent tax. The proceeds from the cess, which was originally planned for five years after GST roll-out or till June 2022, were used to compensate states for revenue loss incurred by them post the introduction of GST.

In 2022, the Council decided to extend the levy till March 2026 to repay the interest and the principle amount of the Rs 2.69 lakh crore worth loan taken in the 2021 and 2022 fiscal years to make good states' revenue loss during Covid years.

With just one-and-a-half year remaining for the cess to end, the GST Council in its 54th meeting on September 9 decided to set up a GoM to decide the future course of the cess.

"The Terms of Reference of the GoM is to make taxation proposal to replace compensation cess after its abolition," the GST Council Secretariat said in an office memorandum.

The task before the GoM is quite critical as it would have to suggest whether the levy would continue as cess or additional tax. If it is called cess, then like any other cess under tax laws, the collection would go to the Centre.

If the GoM decides not to levy cess but impose additional taxes on luxury, sin and demerit goods, then it has to suggest what would be the rates, how many new slabs would be required and what are the legislative amendments that would be required.

Currently, goods and services tax (GST) is a four-tier tax structure with slabs at 5, 12, 18, and 28 per cent. However, as per GST law, tax of up to 40 per cent can be imposed on goods and services.

As per the calculations, the interest and principal of the Rs 2.69 lakh crore loan would be repaid by January 2026. The collection from the compensation cess in February and March, 2026 is estimated to be Rs 40,000 crore.

The GST law provides that any additional amount collected in the compensation cess pool would be divided equally between the Centre and states.

The GST Council would also have to decide whether it would continue with the compensation cess till March 2026 or end it by January 2026 or as and when the loan is repaid and bring in the new taxation proposal as per the suggestions of the GoM on GST compensation cess.