Ministers' panel discusses merger of GST compensation cess

A group of ministers (GoM) headed by Minister of State for Finance Pankaj Chaudhary met on Wednesday to consider the suggestion to integrate the Goods and Services Tax (GST) compensation cess with the broader tax structure, as this cess is going to end in March 2026.

The representatives of states said in their resolution that during the transition, no new goods should be placed on the list of luxury, sin, and demerit goods. They said that the end of compensation cess is a good opportunity to restructure it as a tax but its distinct rates for affected items must remain.

Every state has provided its perspective. That was our first meeting to discuss whether the cess should continue the way it is or be merged into the tax system and at the same time with possible changes in the classification of goods, Chaudhary said.

Members from states such as Assam, Chhattisgarh, Gujarat, Karnataka, Madhya Pradesh, Punjab, Tamil Nadu, Uttar Pradesh, and West Bengal comprise the GoM, which has been tasked to report back to the GST Council by December 31.

Compensation cess has, in its previous avatars, been imposed on luxury, sin, and demerit goods while charging different rates and in addition to the existing 28 per cent GST. The income generated through this cess was initially supposed to assist states in retrieving their losses since the introduction of GST. Although the initial deadline for this cess was supposed to be in June 2022, it was extended up to March 2026 due to pressure on finances as far as the COVID-19 pandemic is concerned, which was funded based on a huge loan taken by the central government.

With barely one-and-a-half years more left before the existing cess ends, the GST Council constituted the GoM at its 54th meeting held on September 9, where the way forward for the compensation mechanism would be decided. The next meeting is slated for the second week of November.