The group of ministers (GoM) on GST compensation cess, under Minister of State for Finance Pankaj Chaudhary, on October 16 discussed merger of compensation cess into GST.
During the meeting of the 10-member panel, states recalled the discussions that took place in the 7th GST Council meeting on December 22-23, 2016, wherein the erstwhile Union Finance Minister Arun Jaitley had said that the compensation cess could be merged with the tax once the five-year period of the levy ends.
Before the implementation of the Goods and Services Tax (GST) from July 1, 2017, Centre and states had agreed to levy cess on certain luxury, sin and demerit goods over and above the 28 percent tax rate. The proceeds from the cess, which was called compensation cess, would go towards compensating states for revenue loss suffered post GST implementation for a five-year period.
As per the minutes of the 7th GST council meeting, Jaitley had stated that the Council in its previous meetings had discussed the mechanisms for funding compensation.
"…finally the formulation that was agreed upon was the one which was least burdensome for consumers, namely to collect cess on certain luxury and demerit goods in excess of 28% tax, and that after five years, this cess could be merged with the tax," said Jaitley as per the minutes of the 7th Council meeting.
Sources said that states also suggested that once it is decided to merge the cess with taxes, no new goods should be added to the list of luxury, sin and demerit goods.
States were of the view that since the compensation cess ends in March 2026, the only way to restructure it is to merge the levy with the taxes and bring about separate tax rates for the items on which cess is levied, a source said.
Talking to reporters after the meeting, Chaudhary said every state has given their views in Wednesday's meeting and the GoM would meet again in the second week of November.
"GST compensation cess is coming to an end. A discussion needed to be done on what will be the future of the cess. Every state has given their views. This was the first meeting," he said.
Should it continue as cess or be converted to tax and whether there would be changes in luxury, demerit and sin goods items, Chaudhary said, "Discussion is going on".
Sources said all states have suggested merger of taxes under GST, because compensation cess has expired.
"But no new goods will be added. Compensation period has ended and if it has to be brought under GST then it has to be restructured and brought in as taxes. The proceeds from the tax on such items should be divided equally between centre and states," sources said.
The GoM, which includes members from Assam, Chhattisgarh, Gujarat, Karnataka, Madhya Pradesh, Punjab, Tamil Nadu, Uttar Pradesh and West Bengal, is mandated to submit its report to the GST Council by December 31.
In the GST regime, compensation cess at varied rates is levied on luxury, sin and demerit goods over and above the 28 percent tax. The proceeds from the cess, which was originally planned for five years after GST roll-out or till June 2022, was used to compensate states for revenue loss incurred by them post the introduction of GST.
In 2022, the Council decided to extend the levy till March 2026 to repay the interest and the principle amount of the Rs 2.69 lakh crore worth loan taken in the 2021 and 2022 fiscal years to make good states' revenue loss during Covid years.
With just one-and-a-half year remaining for the cess to end, the GST Council in its 54th meeting on September 9 decided to set up a GoM to decide the future course of the cess.
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