In its meeting held early this month, the Goods and Services Tax Council decided to set up a Group of Ministers (GoM) to suggest “how to go about” the GST compensation cess, which is levied on luxury, sin and demerit goods after the loans taken to meet the revenue shortfall of states during Covid-affected years are repaid.
Reports that the Group of Ministers will be “reworking its nomenclature” suggest policymakers intend to continue the levy even after the March 31, 2026 deadline, when it is supposed to be withdrawn as per the subsisting arrangement.
Why should the levy be continued?
Following the Constitution Amendment Act, 2016, which introduced the GST, the Union Government also introduced the GST Compensation Act, 2017.
It provided for compensation to the states for five years from July 1, 2017, to June 30, 2022, to cover revenue losses.
The rationale behind keeping these arrangements in place for five years was that, by the end of this transition, the GST dispensation would have acquired the much-needed “vitality” and “resilience” to generate sufficient resources for the states to meet their budgetary requirements within the prudential limits set under the Fiscal Responsibility and Budget Management Act (FRBM), thereby obviating the need for continued support.
Was the purpose served?
From July 1, 2017, to March 31, 2019, cess collections exceeded the shortfall in states’ tax revenue, resulting in a surplus of about Rs 47,500 crore. During FY 2019-20, the cess proceeds fell short of the states’ requirements by Rs 70,000 crore. Adjusting for the previous two years’ surplus, the unmet deficit at the beginning of FY 2020-21 was Rs 22,500 crore. The Covid pandemic then had a devastating effect, leaving a hole of Rs 235,000 crore in the cess pool during 2020-21.
To make up for the deficit, the Centre borrowed a total of Rs 2,68,000 crore (Rs 1,10,000 crore during 2020-21 and Rs 1,60,000 crore during 2021-22) under a special window set up in consultation with the Reserve Bank of India (RBI) at a “low” rate of interest and transferred the funds to states as back-to-back loans. To repay the loan and interest, the GST Council extended the cess till March 31, 2026.
According to Finance Minister Nirmala Sitharaman, the entire loan of Rs 2,68,000 crore would be fully serviced by January 2026, two months ahead of the March 31, 2026 deadline. As per estimates, cess collections during February and March 2026 are expected to be about Rs 40,000 crore. The GoM will decide how to apportion this between the Centre and the states.
Meanwhile, the states want the GST compensation cess to continue beyond March 31, 2026, saying they require more revenue to meet development needs. This is plain rhetoric. In recent years, tax collections have been buoyant. During 2022-23, average monthly GST collections were around Rs 1,50,000 crore. During 2023-24, these were even higher at Rs 1,68,000 crore. The revenue argument for continuing the cess is, therefore, untenable.
Giving the states a buffer (read compensation cess) for five years has served its purpose. It is only apt that it goes.
Currently, petroleum products (POL) are taxed under the pre-GST regime, entailing exorbitant levies. For instance, in Delhi, taxes (CED plus VAT) account for nearly 80 per cent of the ex-refinery price of petrol. Taxing it under GST will result in a steep reduction in states’ tax collections, even if kept in the highest 28 per cent slab. To help them make up for this loss, the council may continue with the cess with a provision for exit after five years when it taxes POL under GST, say from April 2026.
(The writer is a policy analyst)
https://www.deccanherald.com/opinion/compensation-cess-should-go-3240810