MoS Finance likely to be convenor of GoM on GST compensation cess

Finance Minister Nirmala Sitharaman

The Group of Ministers on reworking the nomenclature for GST compensation cess is likely to be convened by Union Minister of State for Finance Pankaj Chaudhary and include members from states, an official has said.

The official further said the Terms of Reference (ToR) and the members of the GoM are in the process of getting finalised.”The GoM will have to suggest how the cess collected on demerit and luxury goods will be apportioned between Centre and states and suggest the legal changes that would be required to enforce the change,” the official said.

The members of the Group of Ministers (GoM) on GST compensation cess are in the process of being decided.

But, since the issue is with regard to cess, which is collected by the Centre, and its apportionment, the GoM would have a member from the Centre as well, the official explained.

Generally, the senior-most member of the GoM is made its convenor. So, the Union Minister of State for Finance is likely to be the convenor of the GoM on GST compensation cess, the official told PTI.

The GST Council, in its meeting last week, had decided to set up a panel of ministers to suggest to the Council how to go about the GST compensation cess, which is levied on luxury, sin and demerit goods after the loans taken to meet the shortfall in revenue of states during Covid-affected years are repaid. The government had borrowed Rs 2.69 lakh crore in fiscals 2021 and 2022 to make good states’ revenue loss, and the GST Council had then decided to extend the compensation cess levy till March 2026 to repay the loan and interest.

Finance Minister Nirmala Sitharaman last week said the loan and interest are expected to be repaid as early as December 2025 or January 2026.

The GoM will decide on the future of the levy, how it would be apportioned between the Centre and states, and changes required in law as it cannot be called compensation cess any more.

Since the government may be able to repay the Rs 2.69 lakh crore borrowings done in fiscals 2021 and 2022 to compensate states for GST revenue loss by January 2026, about four months ahead of the scheduled March 2026, the GoM would suggest how the cess amount would be apportioned beyond January 2026.

As per estimates, the collections from GST compensation cess in February and March 2026 are expected to be about Rs 40,000 crore.

A compensation cess was initially brought in for 5 years to make good the revenue shortfall of states, following the implementation of the Goods and Services Tax (GST). The compensation cess expired in June 2022, but the amount collected through the levy is being used to repay the interest and principal of the Rs 2.69 lakh crore that the Centre had borrowed during COVID-19.

To meet the resource gap of the states due to the short release of compensation, the Centre borrowed and released Rs 1.1 lakh crore in 2020-21 and Rs 1.59 lakh crore in 2021-22 as back-to-back loans to meet a part of the shortfall in cess collection.

In June 2022, the Centre extended the levy of compensation cess till March 2026 to repay borrowings done in FY21 and FY22 to compensate states for revenue loss.GST was introduced on July 1, 2017, and states were assured of compensation for the revenue loss till June 2022 arising on account of the GST rollout.

Though states’ protected revenues were growing at 14 per cent compounded growth post-GST, the cess collection did not increase in the same proportion.