Understanding GST Compensation Cess: Current Status and Key Updates
The Indian Finance Ministry recently addressed concerns about the sufficiency of the Goods and Services Tax (GST) compensation cess fund, emphasizing its robust management and commitment to fulfilling obligations to states.
What Is GST Compensation Cess?
The GST compensation cess is levied on select items in the 28% tax bracket, such as tobacco, aerated drinks, and luxury goods. It was introduced under the GST (Compensation to States) Act, 2017, to compensate states for revenue losses following the transition to GST. Initially, the cess was to be levied for five years after GST’s rollout in July 2017, but it was extended until March 2026 to address pandemic-related shortfalls.
Finance Ministry’s Assurance: No Cause for Alarm
In response to reports suggesting a potential shortfall in the cess fund, the Finance Ministry clarified key points:
- Sufficient Collections:
- Budget estimates for FY 2024-25 target ₹1.51 lakh crore in cess collections.
- By November 2024, ₹1 lakh crore was already collected, achieving 66% of the target with a 7% year-on-year growth.
- Repayment Commitments:
- ₹92,087 crore was repaid in FY 2023-24.
- ₹1.34 lakh crore is planned for FY 2024-25.
- Full repayment of back-to-back loans is expected before March 2026.
- Projected Surplus:
- After all obligations, a minor surplus in the cess fund is anticipated, to be shared equally between the Centre and states.
Loan Management During the Pandemic
To support states during the pandemic-induced economic slowdown, the Centre borrowed and released ₹1.1 lakh crore in 2020-21 and ₹1.59 lakh crore in 2021-22 through back-to-back loans. These loans are being repaid using proceeds from the extended compensation cess.
Legal Context: Case Laws on GST Compensation
Legal rulings have clarified the obligations and rights under the GST Compensation Act:
- State of Punjab v. Union of India (2023): The court reaffirmed the Centre’s obligation to ensure timely compensation payments under the Act, emphasizing cooperative federalism.
- Karnataka Traders’ Association v. GST Council (2024): The court upheld the cess extension as a valid measure to fulfill repayment commitments, ensuring no financial burden on taxpayers beyond luxury and sin goods.
Current Disbursement Status
The Finance Ministry highlighted that:
- ₹5,508 crore of the final ₹13,000 crore payment to states has been disbursed.
- The remaining amount will be released upon receiving audited accounts from six states.
Impact on States and Businesses
States benefit from the certainty of compensation, allowing better financial planning. For businesses, the clear repayment and surplus projection dispel fears of higher tax rates or additional cess burdens.
Conclusion: A Well-Managed System
The Finance Ministry’s proactive measures ensure that the GST compensation cess fund is on track to meet its obligations. By balancing collections, repayments, and surplus sharing, the system fosters trust and transparency, reinforcing India’s federal fiscal framework.