Context:
The Goods and Services Tax (GST) Council recently set up a 10-member GoM to decide on the taxation of luxury, sin, and demerit goods once the compensation cess ends in March 2026.
Relevance:
GS III: Indian Economy
GST Compensation Cess
The GST Compensation Cess is imposed under Section 8 of The Goods and Services Tax (Compensation to State) Act, 2017, with the aim of addressing the tax revenue loss faced by states after the implementation of GST.
Why is GST Compensation Cess Levied?
- GST is a consumption-based tax, which means the state where goods are consumed benefits from the indirect tax revenue.
- However, states that are net exporters of goods and services are expected to see a reduction in indirect tax collections.
- To offset this revenue loss, the Central Government introduced the GST Compensation Cess to ensure states are adequately compensated.
Usage of GST Compensation Cess:
- All funds from this cess are credited to the GST Compensation Fund, a non-lapsable fund.
- The money is utilized to compensate states for any loss of tax revenue due to the shift to GST.
- Unused funds at the end of the transition period are shared equally between the Central Government and the State Governments.
- States receive their share based on their total tax revenues in the final year of the transition period.
Applicability:
- The GST Compensation Cess is applicable to the supply of specific goods or services as notified by the Central Government.
- Both intrastate and interstate supplies of goods or services are subject to the cess.
- All taxable entities under GST, except those registered under the GST Composition Scheme, are expected to collect and remit the cess.
- Cess is primarily levied on luxury, sin, and demerit goods such as cigarettes, tobacco products, soft drinks, and luxury cars.
Extension of GST Cess:
- The GST Council decided to extend the levy of the GST Compensation Cess till March 2026. This extension aims to repay the loan of ₹2.69 lakh crore taken to compensate states for revenue loss during the COVID-19 pandemic.
-Source: The Hindu
