Centre, states near deal to merge GST compensation cess into tax regime: Report

GST ( Representative Image)

The Centre and states are close to reaching an agreement on folding the GST compensation cess into the broader Goods and Services Tax (GST) framework, Mint reported. A consensus is also emerging on sharing the surplus cess collections between the Centre and the states.

The compensation cess, levied on luxury goods, tobacco, coal, and SUVs, is expected to bring in Rs 1.67 lakh crore this fiscal year. It is set to expire in March 2026, marking the end of an eight-year run since its introduction in 2017 to offset states' revenue losses post-GST rollout.

The Centre had borrowed Rs 2.69 lakh crore during the pandemic to support states, with cess collections being used for repayments. With the loans nearly settled, the government anticipates a surplus of around Rs 40,000 crore, which may now be divided between the Centre and states.

However, the report noted that there is no agreement yet on scrapping the 12% GST slab. While some in the Centre believe that shifting most items in this slab to the 5% rate could widen the tax base and compensate for short-term revenue loss, states remain cautious. Items currently taxed at 12% include packaged drinking water, bicycles, butter, jams, solar devices, and wooden furniture.

"Revenue collection should not be seen merely through the lens of tax rate. It is a function of the tax rate and the tax base," one official told Mint, arguing that lowering rates could still boost overall revenue through broader compliance.

A ministerial panel led by MoS Finance Pankaj Chaudhary is tasked with advising the GST Council on how to transition the cess into a new format. The Council is expected to meet after the Parliament’s monsoon session, likely in late August or early September.

Experts say the rationalisation of GST rates could help boost consumption, especially when combined with monetary easing by the RBI and recent income tax reliefs. According to the report, the central GST collection is expected to grow 11.3% this year, indicating tax buoyancy and improved compliance.