Compensation cess to states might be terminated by October 31
What's the story
The Goods and Services Tax (GST) Council is likely to discuss the early termination of the compensation cess during its meeting on September 3-4. The deadline for ending this cess is currently set for March 31, 2026. However, with loans taken during the COVID-19 pandemic years nearing full repayment, there are talks of ending it sooner.
Financial implications
A look at the proposal
Government sources have indicated to Moneycontrol that the cess could end by October 31, leaving a surplus of some ₹2,000-3,000 crore. This surplus would then be equally distributed between the Centre and the states. The proposal is to continue the levy until the end of October for smooth processes. However, once the repayment is done, the legal mandate for cess collection expires as per law.
Cess
Compensation cess was introduced in 2017
The compensation cess, which was introduced in July 2017, was meant to compensate states for revenue losses during the first five years of GST implementation. The legal window for this compensation ended in June 2022. However, it was extended till March 2026 to service loans taken during the pandemic years when revenues were severely affected.
Aid details
Centre borrowed ₹2.69L crore on behalf of states
During the COVID-19 pandemic, the Centre had given states ₹1.1 lakh crore in FY 2020-21 and ₹1.59 lakh crore in the following year, as loans to cover GST compensation shortfall due to revenue losses. This total of ₹2.69 lakh crore was borrowed by the government on behalf of states and then passed on to them as loans for financial management purposes.