Govt extends GST compensation cess levy till March 2026

Ahead of next week’s Goods and Services Tax (GST) Council meeting, the government has extended the time for levy of GST compensation cess till March 31, 2026.

As per the Goods and Services Tax (Period of Levy and Collection of Cess) Rules, 2022, notified by the finance ministry, the compensation cess will continue to be levied from July 1, 2022, to March 31, 2026.

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The levy of cess was to end on June 30 but the GST Council, chaired by Union Finance Minister Nirmala Sitharaman and comprising state FMs, decided to extend it till March 2026 to repay the loans taken in the last two fiscal years to make up for the shortfall in their revenue collection.

What FM had said

After the 45th GST Council meeting in Lucknow in September last year, Sitharaman had said the regime of paying compensation to states for revenue shortfall resulting from subsuming their taxes such as VAT in the uniform national tax GST, will end in June 2022.

“That (compensation to states) ends with five years. The five-year (period) ends in July 2022. Beyond July 2022, the cess that we are collecting, as agreed in the 43rd Council meeting, was for the purpose of repaying the loan. That commences in July 2022, and goes on till March 2026 — only and only for paying the loan given to states since last year,” she had said.

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However, the compensation cess, levied on luxury and demerit goods, will continue to be collected till March 2026 to repay the borrowings that were done in 2020-21 and 2021-22 to compensate states for GST revenue loss.

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

The Centre has repaid ₹7,500 crore as interest cost for the borrowing in 2021-22 and ₹14,000 crore is to be paid this fiscal year. From 2023-24, the repayment of principal amount will start which will continue till March 2026.

GST compensation cleared

On May 31, the government said it had released the entire amount of GST compensation payable to states up to May 31, 2022, by releasing an amount of ₹86,912 crore.

“This decision was taken to assist the states in managing their resources and ensuring that their programmes especially the expenditure on capital is carried out successfully during the financial year. This decision has been taken despite the fact that only about ₹25,000 crore is available in the GST Compensation Fund. The balance is being released by the Centre from its own resources pending collection of cess,” the Ministry of Finance said.

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Goods and Services Tax was introduced in India on July 1, 2017, and states were assured compensation for loss of any revenue arising on account of implementation of GST as per the provisions of the GST (Compensation to States) Act, 2017 for a period of five years.

For providing compensation to states, cess is being levied on certain goods and the amount of cess collected is being credited to Compensation Fund. Compensation to states is being paid out of the Compensation Fund from July 1, 2017.

The 47th meeting of the GST Council will be held on June 28-29 in Srinagar.

The 47th meeting of the GST Council will be held on June 28-29, 2022 (Tuesday & Wednesday) in Srinagar.@FinMinIndia @GST_Council @PIB_India

— NSitharamanOffice (@nsitharamanoffc) June 16, 2022

(With inputs from agencies)