GST Council Establishes GoM on Compensation Cess

The Goods and Services Tax (GST) Council has formed a 10-member Group of Ministers (GoM), chaired by Minister of State for Finance Pankaj Chaudhary, to address the future taxation of luxury, sin, and demerit goods as the compensation cess is set to expire in March 2026. The GoM comprises representatives from Assam, Chhattisgarh, Gujarat, Karnataka, Madhya Pradesh, Punjab, Tamil Nadu, Uttar Pradesh, and West Bengal, with a report expected to be submitted by December 31.

Purpose of the GoM

The GoM’s primary objective is to propose a new taxation structure to replace the compensation cess after its abolition. Currently, the compensation cess, levied at varying rates on specified goods in addition to the 28% GST, was originally intended to last five years following the rollout of GST. However, the government decided to extend the cess until March 2026 to repay a ₹2.69 lakh crore loan borrowed to cover revenue losses experienced by states during the COVID-19 pandemic.

Critical Decisions Ahead

With only a year and a half left until the cess’s conclusion, the GoM faces the crucial task of determining whether to maintain the cess as is or transition to an additional tax on luxury, sin, and demerit goods. If it remains a cess, the collections would go directly to the central government, whereas an additional tax would require new rate proposals and legislative amendments.

Implications for GST Structure

Currently, GST operates under a four-tier tax structure with rates set at 5%, 12%, 18%, and 28%. However, the GST law permits a tax of up to 40% on goods and services. By January 2026, it is anticipated that the principal and interest on the ₹2.69 lakh crore loan will be fully repaid, allowing the GST Council to reevaluate the necessity of the compensation cess based on GoM recommendations. Any surplus collected in the cess pool post-loan repayment would be shared equally between the Centre and the states.