GST Council to Discuss Apportioning and Renaming Compensation Cess Beyond March 2026

The Goods and Services Tax (GST) Council, responsible for shaping the trajectory of India’s taxation landscape, is set to deliberate on crucial matters concerning the fate of compensation cess beyond March 2026. This vital discussion comes in light of the impending deadline to repay loans procured by the Central government to compensate states for their revenue loss during the COVID-19 pandemic.

The Genesis of Compensation Cess

The compensation cess was initially introduced as a short-term measure, spanning five years, aimed at bridging the revenue shortfall experienced by states following the rollout of the GST regime. It was conceived as a financial lifeline for states grappling with fiscal challenges brought about by the new tax framework.

Post-Expiry Scenario

The compensation cess, which initially expired in June 2022, has not ceased to be relevant. Instead, the funds collected through this levy have been instrumental in repaying the interest and principal on the massive Rs 2.69 lakh crore debt incurred by the Central government during the COVID-19 crisis.

The Dilemma and the Path Forward

As the March 2026 deadline approaches, the GST Council faces a conundrum. It must make pivotal decisions on the nomenclature of the ‘GST compensation cess’ and establish a clear framework for its distribution among the states.

At the 52nd GST Council meeting held on October 7, the issue was raised by several states, with Karnataka putting forth the concept of ‘prospective planning’ for tax revenues collected under the GST compensation cess account. Questions arose regarding the fate of the cess amount after March 2026. Would it continue as a cess or take on a different name? What would be its purpose, and how would it be apportioned among the states? Furthermore, should the base year for calculation remain as the 2015-16 financial year, or should a new benchmark be established?

Chhattisgarh Deputy Chief Minister T. S. Singh Deo articulated the consensus of the House, emphasizing the need to explore these questions and consider a new financial year as the base.

Bridging the Revenue Gap

To mitigate the resource deficit experienced by the states due to the short release of compensation, the Central government undertook significant borrowing and disbursed Rs 1.1 lakh crore in 2020-21 and Rs 1.59 lakh crore in 2021-22 as back-to-back loans. These funds were aimed at offsetting a portion of the shortfall in cess collection.

The Extension of Compensation Cess

In June of the previous year, the Central government formally extended the compensation cess, imposed on luxury and demerit goods, until March 2026. This extension was primarily to facilitate the repayment of loans acquired in 2020-21 and 2021-22, intended to compensate states for the loss of GST revenue.

Renaming and Appropriation

Finance Minister Nirmala Sitharaman has indicated that the GST Council has concurred on the necessity to deliberate on the renaming of the cess and the manner in which it should be shared between the Central government and the states. The discussions are rooted in the context of prospective planning, exploring alternative uses for the cess or surcharge and identifying the best course of action.

Protecting State Revenue

When GST was introduced on July 1, 2017, states were guaranteed compensation for revenue losses until June 2022, stemming from the GST rollout. Despite the protected revenue of states growing at a compounded rate of 14 percent, the collection of cess did not keep pace. The COVID-19 pandemic further exacerbated the gap between protected revenue and actual revenue receipts, including a decline in cess collection.

Meeting Financial Obligations

To ensure that states were not adversely impacted by the shortfalls in compensation, the Central government borrowed and disbursed a substantial amount, totaling Rs 2.69 lakh crore, in 2020-21 and 2021-22 as back-to-back loans. These loans are slated for repayment by March 2026.

In conclusion, the deliberations of the GST Council regarding the future of compensation cess beyond March 2026 are of utmost importance. The decisions taken in this regard will significantly impact the fiscal dynamics of both the Central government and the states. As the Indian economy continues to evolve, it is imperative that the taxation system remains adaptive and responsive to the changing needs of the nation.


What is the purpose of the compensation cess in the GST framework?

The compensation cess was introduced to bridge the revenue shortfall experienced by states following the implementation of the GST.

Why is the GST Council discussing the renaming of the compensation cess?

The discussion is aimed at considering alternative uses and ensuring equitable distribution of the cess beyond March 2026.

How has the COVID-19 pandemic impacted the collection of compensation cess?

The pandemic has exacerbated the gap between protected revenue and actual revenue receipts, including a decline in cess collection.

What are the potential outcomes of the GST Council’s deliberations on the compensation cess?

The outcomes may include a new name for the cess, a revised framework for its distribution, and addressing the use of the cess in prospective planning.

What is the timeline for the repayment of loans taken by the Central government related to compensation cess?

The loans, amounting to Rs 2.69 lakh crore, are scheduled for repayment by March 2026.

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