By almost four years, until March 31, 2026, the government has prolonged the deadline for the GST compensation cess levy.
The compensation cess will continue to be collected from July 1, 2022, to March 31, 2026, in accordance with the Goods and Services Tax (Period of Levy and Collection of Cess) Rules, 2022, which were announced by the finance ministry.
On June 30, the cess levy was supposed to terminate. However, the GST Council, which consists of state FMs and is presided over by Union Finance Minister Nirmala Sitharaman, opted to prolong it till March 2026 in order to return the loans that were obtained in the previous two fiscal years to make up for the shortfall in their revenue collection.
The system of compensating states for revenue shortfalls brought on by the inclusion of their levies, including VAT, in the single national tax GST, will stop in June 2022, Sitharaman stated following the 45th GST Council meeting in Lucknow in September of last year.
To repay the borrowings made in 2020–21 and 2021–22 to make up for states’ lost GST revenue, a compensating cess on luxury and depreciable products will still be collected until March 2026.
The Center has borrowed and issued Rs 1.1 lakh crore in 2020–21 and Rs 1.59 lakh crore in 2021–22 as back-to-back loans to cover a portion of the shortfall in cess collection, which is causing the states’ resource gaps.
For the borrowing in 2021–2022, the Center has paid back Rs 7,500 crore in interest costs, and Rs 14,000 crore is still owed this fiscal year. The principal will be repaid beginning in 2023 and will continue through March 2026.
On July 1, 2017, the government implemented the Goods and Services Tax (GST), and states were guaranteed reimbursement for any revenue losses resulting from its implementation for five years.
The gap between predicted revenue and the actual revenue receipt, which includes a decrease in cess collection, widened further as a result of COVID-19, despite the fact that states’ protected revenue has been expanding at a 14 percent compounded growth rate.
The whole GST compensation due from the center to the states through May 31, 2022, has been made available.
PTI reported that according to Rajat Mohan, senior partner at AMRG & Associates, the extension of the compensation cess charge will result in increased tax rates being applied to goods including tobacco, cigarettes, hookah, aerated water, high-end motorcycles, aircraft, yachts , and motor cars.
Deloitte India Partner MS Mani, told PTI, “the extension of the levy of compensation cess, although expected, will continue to impose a burden on the impacted businesses, especially sectors like automotive, which need to be encouraged as it is one of the sectors that have a multipler effect on GDP and employment.”
While Abhishek Jain, Partner Indirect Tax, KPMG in India, told PTI, “The issue of whether the states would be compensated beyond five years or not may finally get decided in the upcoming GST Council meeting.”