A key group of ministers (GoM), led by Minister of State for Finance Pankaj Chaudhary, is reviewing how the GST compensation cess can be continued even after March 2026. This move could impact the amount of money the central and state governments receive in the future.
The Goods and Services Tax (GST) Council, chaired by Union Finance Minister Nirmala Sitharaman and including finance ministers from all states, is expected to meet soon. According to a report by BusinessLine, the Council will discuss several important issues in its upcoming meeting, including simplifying GST rates, reducing the number of tax slabs, and deciding the future of the compensation cess.
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When GST was introduced in 2017, states were promised that they would be compensated for any revenue loss for the first five years. The Centre started collecting a special tax called the compensation cess on certain goods like luxury items and sin goods such as tobacco and high-end cars to fund this. However, the government revenues dropped sharply during the COVID-19 pandemic. To make up for the shortfall in states’ GST income, the Central government borrowed large amounts of money. Now, the compensation cess collected is mainly being used to repay those loans, not to directly compensate states.
The Group of Ministers on Compensation Cess, headed by Pankaj Chaudhary, is now exploring whether the cess should continue beyond March 2026, when the loan repayments are expected to end. If the cess is retained, the group is also examining how it should be shared between the Centre and the states and whether it should continue in its current form or be restructured for new uses. This decision is important because the cess brings in a lot of extra revenue, especially from sectors like luxury goods and tobacco.
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The two other Groups of Ministers, who were tasked with reviewing tax exemptions and rate cuts, especially in health insurance and life insurance, have still not submitted their final reports. These issues were not discussed in the last GST Council meeting held in December 2023, and no Council meeting has taken place in the last five months.
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With the GST Council expected to meet soon, it is likely that discussions will finally move forward on simplifying GST rates, making GST compliance easier for businesses, and finalising the future of the compensation cess. These decisions could shape the future of India’s tax system and will affect both governments and businesses across the country.
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