The goods and services tax council is expected to take a call on the future of the compensation cess by October, as the repayment of the GST compensation loan, raised to meet the shortfall in states’ revenues during the pandemic, is likely to be done ahead of schedule, three government sources have said.
“With the repayment likely to conclude by October on account of robust GST revenues, the council will need to urgently decide on its (cess’) treatment,” one of the sources told Moneycontrol. “There are no easy answers but a decision must be made soon, ideally before the loan is fully repaid,” the source added.
Underlining the urgency, a second source also stressed on the need for a decision before October.
The Centre borrowed around Rs 2.69 lakh crore under a special window to compensate states for GST shortfall during the covid pandemic years, especially FY21 and FY22. The Centre had to borrow mean as it was unable to meet its obligation from cess collections due to a sharp fall in revenues. While the cess was extended to March 2026 to pay the loan, the repayment is projected to conclude by October.
The cess is levied on so-called “sin goods” such as tobacco, aerated drinks, coal and high-end automobiles. The Centre collects the cess and deposits into a non-lapsable Compensation Fund, used to bridge states' revenue losses due to the implementation of GST. Payments are then disbursed to states based on the calculated shortfall every two months.
Legal, constitutional uncertainty
The five-year period for compensating states ended in June 2022. However, cess collection was allowed to continue solely for loan repayment. Now, with that objective nearly met, questions are being raised over the validity of the levy.
“The way Parliament had mandated it, the cess was meant specifically to compensate states. Once that need is met, the levy should ideally be stopped or its purpose redefined,” the second source said.
“You don’t have the constitutional mandate to collect the cess beyond the compensation requirement,” a third source said, adding collections beyond October could invite legal scrutiny.
The cess is attached with a purpose, which would be met by October. “If you want to collect beyond that, the legal framework will need to be reworked,” the source added.
GoM report awaited
A 10-member group of ministers (GoM), chaired by minister of state for finance Pankaj Chaudhary, was set up to examine the cess’ future. The panel is yet to submit “concrete recommendations”, sources said.
West Bengal, Madhya Pradesh, Punjab, Uttar Pradesh, Assam, Chhattisgarh, Gujarat, Karnataka and Tamil Nadu are the other members of the GoM.
“We will have to arrive at a decision on the GoM’s proposal before October,” the source said. “Since the timeline is fixed, the review must be concluded before the cess runs out of relevance.”
Depending on the outcome, especially if the cess is merged into the 28 or 40 percent GST slabs, implementation could require state-level legislative changes. “Such changes often take time, so we need to work backwards from the October deadline,” the second source said.
The GST council, led by the union finance minister and represented by a minister from each of the state, is expected to meet after the monsoon session of Parliament. The monsoon session ends on August 21.
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