States convey support for compensation cess merger with 28% GST slab

State FMs, in first meeting of GoM, suggest no new item in lists of luxury, sin, and demerit goods until transition

State governments have conveyed to the Centre their support for the merger of the compensation cess with the highest goods and services tax (GST) slab of 28 per cent after March 2026, when the existing regime expires.

In the first meeting of the Group of Ministers (GoM) on GST compensation, led by Union Minister of State for Finance Pankaj Chaudhary, on Wednesday, states advocated that during the transition period towards the cess merger, no additional goods should be added to the existing lists of luxury, sin, and demerit goods.

"All states have requested the merging of the cess with the GST rates. The cess is currently collected by the central government; merging it with the GST rate would enable states to increase their revenue as it would then be shared equally between the Centre and states. The GoM will discuss the method of integrating the compensation cess rates with GST in its next meeting,” elaborated one of the state finance ministers, requesting anonymity.

The GoM has been asked to submit its report to the GST Council by December 31.

“The meeting was called to discuss the issue of compensation cess. States shared their views on this matter. It was also discussed whether compensation cess should be extended or reduced. However, no decision was made. The second meeting of this GoM will be held in the second week of November," Chaudhary said.

When GST was introduced in July 2017, states were assured of compensation for any revenue loss arising from the GST implementation for five years. To this end, a compensation cess is levied at varying rates on luxury, sin, and demerit goods above the 28 per cent slab.

While compensation payments to states officially ended in June 2022, the programme was extended until March 2026 to facilitate the repayment of a Rs 2.7 trillion loan incurred by the Centre during the Covid pandemic to address revenue shortfalls.

During the 54th GST Council meeting on September 9, Union Finance Minister Nirmala Sitharaman indicated the government’s intention to fully repay the loan, including interest, by January 2026. This could result in a surplus of approximately Rs 40,000 crore from cess collections in February and March 2026. Consequently, the Council discussed the need for a comprehensive review of the future of the compensation cess and proposed the establishment of a GoM to formulate a taxation proposal to replace the cess after its discontinuation.

Pratik Jain, partner at PWC India, noted that if the cess is to be integrated into GST rates, new slab rates would need to be established. “Currently, the GST laws stipulate a maximum rate of up to 40 per cent,” he explained.

Harpreet Singh, partner, indirect tax, Deloitte, argued that merging the cess with GST rates would generally yield benefits in terms of simplicity, better tax administration, efficiency, and ease of compliance. “However, from an industry perspective, it is crucial to ensure that the overall tax burden post-merger does not increase, or perhaps, is reduced,” he added.