GST cess reforms: Time to fix the ‘one nation, one tax’ promise
When the GST regime was launched in July 2017, it promised simplicity — “one nation, one tax.” But over time, that promise has been diluted. One big reason? The growing use of GST cess, which not only complicates the tax structure but also fuels friction between the Centre and States.
Let’s decode what GST cess is, why it has become a pain point, and what reforms are being discussed.
What is GST cess and why was it introduced?
The GST Compensation Cess was introduced under the Goods and Services Tax (Compensation to States) Act, 2017.
Its original purpose was to compensate states for any revenue loss after GST rollout, for a period of 5 years (i.e., till June 2022).
Key features:
- Levied over and above the GST rate on luxury and sin goods
- Applies to items like tobacco, aerated drinks, coal, motor vehicles
- Collected by the Centre and distributed to States as compensation
But here’s the problem
Despite the five-year window ending in June 2022, the cess continues to be collected.
Why?
- To repay borrowings made during COVID-19 for state compensation
- As per GST Council decisions, the levy continues till at least March 2026
This has raised two major concerns:
- Trust Deficit: States feel they are at the Centre’s mercy for compensation.
- Tax Distortion: Extra cess on top of GST destroys the logic of a unified tax rate.
How much is the GST cess collection?
As per the Ministry of Finance, cess collections in FY 2024–25 (so far) have crossed ₹1.25 lakh crore, up from ₹1.15 lakh crore in the previous year.
| Financial Year | GST Cess Collection |
|---|---|
| 2022–23 | ₹1.04 lakh crore |
| 2023–24 | ₹1.15 lakh crore |
| 2024–25 (Q1) | ₹31,500+ crore |
Where does the money go now?
Even though the compensation phase is over, cess proceeds are being used to repay loans taken under the Centre’s borrowing facility (₹2.69 lakh crore) extended to States during 2020–2021.
But legally, this creates a grey area:
- The Compensation to States Act was for revenue loss only.
- Its extension for loan repayment was not part of the original GST deal.
What reforms are being suggested?
During the 53rd GST Council Meeting (June 2024), discussions resumed around long-term cess policy:
- Sunset clause for all cess levies by 2026
- Fresh compensation framework for newer demands by States
- Alignment of cess funds with broader GST fund devolution
Legal experts and economists have called for:
- Independent review of cess collections and use
- Clear separation between GST proceeds and loan repayment cess
- Avoiding ad-hoc levies that complicate GST credits
GST cess and ITC complications
The biggest compliance burden for businesses is that Input Tax Credit (ITC) on cess is not uniformly available.
For example:
- Manufacturers paying Compensation Cess on coal cannot offset it against most outward supplies
- This leads to cascading tax effect, hurting cost structures
Expert tip: Use this rule to simplify compliance
If your business deals with cess-liable goods (like coal, tobacco, or automobiles):
✔ Track separate input and output ledgers
✔ Claim ITC only if allowed under Section 11 of the Compensation Act
✔ Cross-verify cess treatment with GSTN portal reports (GSTR-2B)
Why cess hurts the GST ideal
Here’s the real issue:
The GST was supposed to be destination-based, value-added, and credit-enabled. But the cess:
- Creates multiple effective rates
- Delinks from seamless credit flow
- Centralises control over fund distribution
In short, “one nation, one tax” becomes one nation, many exceptions.
The way forward
The GST Council needs to take bold steps:
- Phase out cesses with a clear cut-off timeline
- Shift to formula-based devolution of GST revenue
- Ensure no levy bypasses the GST credit chain
FAQs
1. Is GST cess applicable to all goods?
No. It is limited to specific goods such as luxury cars, tobacco, coal, and aerated drinks.
2. Can I claim ITC on GST cess?
Only if your outward supply is also liable to compensation cess. Otherwise, ITC cannot be claimed.
3. When will GST cess end?
As per current updates, the cess will continue till March 2026 to repay loans taken during the pandemic.
Google snippet summary
GST cess reforms are needed to uphold the ‘one nation, one tax’ principle. The ongoing cess levy beyond 2022 complicates compliance and erodes GST’s credit chain.
Reform GST, simplify compliance.
Don’t let cess eat into your business margins. For end-to-end GST support — from filings to credit reconciliations — consult Efiletax today.