INTRODUCTION

• The GST Council has formed a Group of Ministers (GoM) to discuss the future of the GST compensation cess.
• This cess is levied on luxury, sin, and demerit goods, primarily to address revenue shortfalls experienced by states during the COVID-19 pandemic.

Current Context

• The cess was originally set to expire on March 31, 2026, but there are indications that policymakers may seek to extend it.
• This extension reflects states’ claims for ongoing revenue to meet developmental needs.

REASONS FOR CONTINUATION

Historical Background

• The GST Compensation Act (2017) was enacted to compensate states for revenue losses post-GST implementation.
• The compensation was calculated based on a 14% annual growth from the 2015-16 revenue level.

Mechanism of Cess

• Introduced in 2018, the cess targets high-tax goods (28% slab), such as automobiles and tobacco, to fund state compensations.
• Initially, it was expected that by 2022, states would have the necessary revenue generation capability to be self-sufficient.

EVALUATION OF EFFECTIVENESS

Revenue Collections

• From July 2017 to March 2019, cess collections exceeded revenue shortfalls, leading to a surplus of ₹47,500 crore.
• In FY 2019-20, the cess fell short by ₹70,000 crore, resulting in a net deficit of ₹22,500 crore.

Impact of COVID-19

• The pandemic severely affected revenue, creating a ₹235,000 crore deficit in the cess pool for 2020-21.
• To address this, the Centre borrowed ₹2,68,000 crore and extended the cess deadline to March 31, 2026.

Future Projections

• Finance Minister Nirmala Sitharaman states the loan will be fully serviced by January 2026.
• Expected cess collections in early 2026 could reach ₹40,000 crore, with the GoM tasked to determine distribution.

STATES’ ARGUMENT FOR CONTINUATION

• States argue the necessity of the cess for ongoing developmental funding.
• Recent tax collection trends show robust growth, with monthly GST collections averaging ₹1,50,000 crore in 2022-23 and rising to ₹1,68,000 crore in 2023-24.
• This trend undermines the argument for continuing the cess based on revenue needs.

CONCLUSION

• The five-year buffer provided by the compensation cess has achieved its purpose.
• With buoyant tax collections, it is reasonable to conclude that the cess should not continue beyond the established deadline.
• Transitioning petroleum products under GST may lead to reduced state revenue; however, the necessity for a cess after five years has diminished.