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Informist, Wednesday, Feb. 12, 2025

 

By Sagar Sen and Priyasmita Dutta

 

NEW DELHI – The GST Council may soon look into the possibility of hiking the peak rate of 40% on certain items, although this would depend on the recommendations of the Group of Ministers on restructuring compensation cess, a senior finance ministry official said.

 

The panel on GST Goods and Services Tax compensation cess, headed by Minister of State for Finance Pankaj Chaudhary, had received a six-month extension from the December deadline to submit its final report, which is now expected by June-end.

 

In October 2023, the GST Council had decided to start looking into the matter of compensation cess in preparation of its discontinuation deadline in March 2026. At its first meeting in October last year, states recommended merging the cess with GST rates once the compensation cess regime ends.

 

The finance ministry official said any tweak in the peak rate can only be done through amendments to the Central and State Goods and Services Tax Act. Once the Centre and states are on board, the amendments may take almost 12 months to be incorporated, the official mentioned above added.

 

The case for raising the peak rate of 40% would arise if the panel recommends a continuation of the current strategy of taxing demerit or sin goods at a higher rate, the official said.

 

According to the Central Goods and Services Tax Act, the rate of taxation under GST must be capped at 20%. State governments too, have similar legislations which stipulates that states cannot impose rates exceeding 20%.

 

Another senior official in the finance ministry said an additional levy may still be needed on tobacco items if states and the Centre agree, while peak rate may apply only to a few demerit goods.

 

The compensation cess is an additional levy on certain luxury and sin goods like tobacco items, motor vehicles, expensive motorcycles, caffeinated beverages and aerated drinks. The original purpose of the cess was to compensate states if they fell short of achieving the 14% revenue growth promised to them for the first five years of the GST regime since its rollout in 2017. While compensation cess was to be discontinued from June 2022, the GST Council decided to extend the levy till March 2026 to repay the loans taken to bridge the shortfall in cess collections during the COVID-19 pandemic.

 

After clearing the dues to states, the compensation cess fund will be left with around INR 400 billion of surplus collections if the cess is levied till March 2026, Finance Minister Nirmala Sitharaman had said.

 

In a post-Budget interview with Informist in July, former revenue secretary Sanjay Malhotra, who is currently the Reserve Bank of India governor, had said that the government planned to stop levying the compensation cess once outstanding GST-related debts were settled, and in lieu, add a component to the 28% GST rate levied on sin goods.

 

"Once the compensation dues have all been cleared, then we will collect it as GST. Compensation cess will be withdrawn, something else will come. As soon as it ends, we will introduce a new GST or increase the 28% GST on those items. There is no proposal to increase the tax incidence," Malhotra had said.  End

 

Edited by Tanima Banerjee

 

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