What's the future of the GST Compensation Cess?

The compensation cess under the goods and services tax (GST) is likely to be renamed but is expected to continue beyond its schedule sunset of March 2026. 

According to two sources, there is expectation that the compensation cess, which is levied on sin and luxury goods at varying rates, above the peak rate of 28%, will continue beyond its deadline as it has proved to be a robust source of revenue.
 
“The two options are either to end the compensation cess when it comes to an end on March 31, 2026 or to continue it in some other form. With steady revenue, there is a view that this levy should remain but it can be in a new manner or name,” said the sources familiar with the development, adding that the issue will have to be decided by the GST council.
 
The cess is levied on items such as cigarettes, pan masala, gutkha, and other tobacco products, soft drinks as well as cars, at different rates. Removing the cess could lead to a drop in prices for consumers. However, retaining it by a different moniker would mean more revenue for both the Centre and states.
 
A discussion on the issue is likely to be initiated in the next meeting of the GST council on September 9.  The council, which is headed by Union finance minister Nirmala Sitharaman and has all state finance ministers as members, had, in its meeting in October last year, decided to discuss the modalities for appropriating the revenue collected by levying compensation cess on luxury, sin, and demerit goods beyond March 2026. Sources have indicated that the Centre may be able to pay off the loans to compensate states against the Covid 19 revenue loss by November 2025.
 
As the name suggests, the cess was initially levied for a period of five years from the roll out of the GST from July 2017 to offset any revenue losses to states for switching to the new indirect tax regime.

However, it was later decided that the cess would continue until March 2026 to help the Centre pay off borrowings it had taken during the Covid 19 pandemic amounting to Rs 1.1 lakh crore in 2020-21 and Rs 1.59 lakh crore in 2021-22 to meet the shortfall of cess collection into Compensation Fund and GST compensation to states and UTs due to the economic fallout of the pandemic.