The issue of compensation cess and the need to compensate states for revenue losses under the Goods and Services Tax (GST) was discussed on Wednesday during the meeting of the Group of Ministers (GoM) on compensation cess under the GST Council. Punjab Finance Minister Harpal Singh Cheema, who is a member of the GoM on compensation cess, said that payments for loans taken during Covid through collections from the cess are set to come to an end in October. He further noted that while the GoM was expected to come up with an alternative mechanism to prevent any revenue losses to states, it has not done so. Punjab is facing a revenue loss of about Rs 21,000 crore per year since the implementation of GST, he said.
As per the Finance Ministry’s proposal to the GoM, the compensation cess will be replaced with a 40% slab on specified sin goods, including tobacco, pan masala, online gaming, and large cars. The rate would be applicable only on five to seven items, they indicated.
The compensation cess is expected to end by March 2026, while repayment of the loan is likely to be completed by January 2026. The GoM will examine what happens to the cess after its sunset date.
Several states in the past have also raised concerns over potential revenue losses due to rate rationalisation under GST and have indicated that they would prefer the compensation cess to continue.
The cess was introduced along with GST to compensate states for potential revenue losses, based on a guaranteed 14% annual growth in revenue for the first five years. It was set to end on June 30, 2022, but was extended till March 2026 as states had to borrow during the Covid-19 pandemic, since they could not be compensated for revenue losses. The cess is set to end by March 2026. The GoM was established to examine what happens to the cess after its sunset date.
