The Group of Ministers (GoM) tasked with revisiting the nomenclature and structure of the GST compensation cess is expected to be convened by Union Minister of State for Finance Pankaj Chaudhary, an official has said. The panel will also include representatives from various states.
The official further revealed that the Terms of Reference (ToR) and members of the GoM are currently being finalised. “The GoM will have to suggest how the cess collected on demerit and luxury goods will be apportioned between Centre and states and suggest the legal changes that would be required to enforce the change,” the official explained.
Since the GST compensation cess involves apportionment of funds collected by the Centre, the GoM will likely have a member from the central government, the official added. They also noted that, typically, the senior-most member of the GoM serves as its convenor, making it likely that the Union Minister of State for Finance will take on this role.
The GST Council, in its meeting last week, decided to establish the panel to advise on the future of the compensation cess, which is levied on luxury, sin, and demerit goods. This comes as the loans taken to cover state revenue shortfalls during the COVID-19 pandemic are expected to be repaid.
“The government had borrowed Rs 2.69 lakh crore in 2021 and 2022 to compensate states for revenue loss during the pandemic. The compensation cess was extended until March 2026 to repay these loans,” the official said.
Finance Minister Nirmala Sitharaman previously stated that the loan and interest payments are expected to be completed by December 2025 or January 2026. The GoM will need to decide on the future of the levy after that, including how the cess will be shared between the Centre and states, and any necessary legal amendments. “It can’t be called compensation cess anymore,” the official noted.
The GoM will also propose how the cess should be apportioned beyond January 2026. It is estimated that collections from the compensation cess in February and March 2026 will amount to around Rs 40,000 crore.
Initially introduced for a five-year period to address states' revenue shortfalls following the implementation of the Goods and Services Tax (GST), the compensation cess expired in June 2022. However, the collections are being used to repay the Rs 2.69 lakh crore borrowed by the Centre during the pandemic.
To bridge the resource gap caused by the shortfall in compensation, the Centre borrowed and released Rs 1.1 lakh crore in 2020-21 and Rs 1.59 lakh crore in 2021-22 as back-to-back loans. In June 2022, the government extended the levy of compensation cess until March 2026 to ensure repayment of these borrowings.
GST, introduced on July 1, 2017, assured states of compensation for revenue losses until June 2022. Despite protected revenues growing at a compound rate of 14%, cess collections did not increase at the same pace.
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