NEW DELHI: The Goods and Services Tax (GST) Council has constituted a 10-member Group of Ministers (GoM), led by Minister of State for Finance Pankaj Chaudhary, to devise a strategy for the future taxation mechanism that will replace the compensation cess post its scheduled abolition.
The GoM, which includes representatives from Assam, Chhattisgarh, Gujarat, Karnataka, Madhya Pradesh, Punjab, Tamil Nadu, Uttar Pradesh, and West Bengal, is tasked with submitting its report to the GST Council by December 31.
According to the Terms of Reference (ToR) provided by the GST Council Secretariat, the GoM is mandated to recommend a comprehensive taxation proposal that will substitute the compensation cess, which was initially designed to offset states’ revenue losses under the GST regime.
Compensation Cess Background
The compensation cess is an additional tax levied on luxury, sin, and demerit goods over and above the standard 28 per cent GST rate. Its primary objective was to compensate states for revenue shortfalls following the rollout of GST in 2017.
While the cess was initially meant to be in place for five years, until June 2022, it has been extended until March 2026 to repay Rs2.69 lakh crore borrowed by the central government during fiscals 2021 and 2022 to cover revenue losses due to the COVID-19 pandemic.
The GoM’s recommendation on whether to phase out, continue, or restructure the compensation cess will significantly impact the fiscal landscape of states, especially those that have relied heavily on the compensation to bridge revenue gaps.
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