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Government notifies GST compensation cess extension to March 2026

The government issued a notification on Saturday extending the goods and services tax (GST) compensation cess until March 31, 2026. The cess was to end on June 30, 2022, five years after the single tax rolled out on July 1, 2017.

The GST Council had last September decided on an extension to raise funds to repay loans taken by states to make up for the shortfall in compensation cess collections due to the pandemic in the last two years. The cess is levied on goods such as automobiles and air conditioners that attract the highest 28% GST and on so-called sin goods such as aerated drinks, coal, pan masala and cigarettes.

As per the agreement between the Centre and the states, the latter were to be compensated for any revenue loss due to the switchover to the GST regime for five years till June 30, 2022. The compensation cess was introduced to fund this. While the compensation to states will cease on June 30, the cess will continue to recoup the shortfall in the last two years. The notification is effective July 1 and will allow the compensation cess to continue on ahost of goods beyond June 30 till March 2026. It comes three days ahead of the next meeting of the GST Council that will be held in Chandigarh on June 28-29.

“The current extension of GST compensation cess up to March 31, 2026, cannot be said to be settling the issue of GST compensation between the Centre and states,” said Saurabh Agarwal, tax partner, EY India. “If states resort to levy of special cess to augment their revenues, it would distort the objective of GST, which is One Nation One Tax.”

Many opposition-ruled states have been demanding an extension of compensation to the states beyond June 30, 2022, and the issue is likely to figure in discussions during the meeting. “The extension of the levy of compensation cess, although expected, will continue to impose a burden on the impacted businesses, especially sectors like automotive, which need to be encouraged as it is one of the sectors that have a multiplier effect on GDP and employment,” said MS Mani, partner, Deloitte India. LOANS The Centre borrowed Rs 1.1 lakh crore in FY21 and Rs 1.59 lakh crore in FY22 as back-to-back loans to meet the shortfall in cess collections.

The borrowed funds were provided to the states to meet the full compensation due to them as per the agreed formula. In FY22, the Centre paid Rs 7,500 crore toward interest costs on the borrowing. This will nearly double to `14,000 crore in the current fiscal year. The repayment of the principal will begin from the next fiscal year. The compensation cess collection is budgeted at `1.2 lakh crore for the current financial year.

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