GST compensation cess may end before March 2026 deadline

GST compensation cess: The Goods and Services Tax (GST) compensation cess levied on products such as automobiles, liquor, cigarettes, aerated water and coal could end earlier than the March 31, 2026 deadline on the back of robust GST collections every month, two officials with direct knowledge of the matter said.

States have been already given “the entire provisionally admissible compensation” amounting to ₹9.14 lakh crore for their revenue shortfalls in the transition period of five years ended June 2022, but the cess has been continued to retire the loan of ₹2.69 lakh crore that was taken during the Covid pandemic for this purpose, they added, requesting anonymity.

While launching the new indirect tax regime, the GST law assured states of a 14% increase in their annual revenue for the five-year period from July 1, 2017 to June 30, 2022. The GST law also guaranteed to meet their revenue shortfall, if any, through a compensation cess levied on luxury goods and so-called sin products.

“The transition period is already over. The centre has already paid the entire provisionally admissible compensation due to states. The cess, however, continues until the ₹2.69 lakh crore back-to back loans taken during Covid to pay the compensation is fully repaid along with interest,” one official said.

As GST collections are robust, the government expects to repay the entire debt ahead of the March 31, 2026 deadline, he added. GST revenues have seen a consistent uptrend post-Covid, since July 2021. The average monthly collection jumped to ₹1.67 lakh crore in the first 11 months of FY24 compared to ₹1.50 lakh crore in FY-23 due to increased compliance and robust economic activity.

On the recommendation of the GST Council — 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. “Accordingly, 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,” the second person said. The Centre borrowed and passed on ₹1.1 lakh crore 2020-21 and ₹1.59 lakh crore in 2021-22 to states to meet their revenue shortfall.

“While provisionally admissible compensation amount for assured five-year period is fully paid the final compensation amount needs to be reconciled with audited figures. The money, if any, will be released immediately on the receipt of the AG’s [auditor general] certificate. But several states have not yet furnished the certificates,” he added.

As per official data compiled last month, AG certificates were pending for at least three financial years for Sikkim, West Bengal and Nagaland. For most other states, AG certificates were pending for only April-June 2022, the officials said. “Karnataka is among the states that have submitted the certificate for each of the five financial years. Based on the certificate, a full compensation amount of ₹1,06,258 crore was released to Karnataka for the five-year transition period since July 1, 2017,” the first official said.

According to officials, while GST compensation cess may end earlier, the government may consider continuing higher duties on these items in some other form to fund government’s green initiatives as reported by HT on December 19, 2022. GST compensation cess on coal is ₹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.

According to officials, while GST compensation cess may end earlier, the government may consider continuing higher duties on these items in some other form to fund government’s green initiatives as reported by HT on December 19, 2022. GST compensation cess on coal is ₹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.

“Technically, the removal of GST compensation cess would make other products cheaper, unless the GST Council decides otherwise,” the second official said adding that any extension would be difficult as that would need endorsement by a three-fourth majority of the weighted votes. In the GST regime, different type of products attracts different cess rates. For example, 72% cess is levied on ‘hookah’ tobacco, 290% on smoking mixture for pipes and cigarettes, 142% on chewing tobacco with lime tube, 204% on pan masala containing ‘gutkha’ tobacco, and 5% plus ₹2,076 per thousand on filter cigarettes of length not exceeding 65 millimetres.

Other items such as pan masala attracts 60% cess; aerated water, lemonade and caffeinated beverages 12%; and different types of motor vehicles, from 1% to 22%. The 48the GST Council that met in New Delhi, clarified on December 17, 2022 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 1,500 cc, length exceeding 4,000 mm and a ground clearance of 170 mm or above.