The extension of the GST compensation cess charge until March 2026

The total amount of GST compensation that was due to be paid out to the states up until May 31, 2022 has been made available by the central government.

The administration has decided to push out the deadline for collecting GST compensation cess by almost four years, until the 31st of March in 2026.

In accordance with the Goods and Services Tax (Period of Levy and Collection of Cess) Rules, 2022, which were notified by the ministry of finance, the compensation cess will continue to be collected beginning on July 1, 2022 and ending on March 31, 2026.

The cess payment was scheduled to end on June 30, but the GST Council, which is comprised of state finance ministers and is chaired by the Union Finance Minister Nirmala Sitharaman, decided to extend it until March 2026 so that they can repay the loans that they took out in the previous two fiscal years to make up for the shortfall in their revenue collection.

Sitharaman had stated that the system of providing compensation to states for revenue deficit that resulted from subsuming their taxes such as VAT in the uniform national tax GST, will terminate in June 2022 after the 45th GST Council meeting that was held in Lucknow in September of the previous year.

The compensation cess, which is imposed on luxury and demerit items, will, despite this, continue to be collected until March 2026 in order to repay the borrowings that were done in the fiscal years 2020-2021 and 2021-2022 in order to compensate states for the loss of income from the GST.

The Central Government has taken out a back-to-back loan in the amount of Rs 1.1 lakh crore for the fiscal year 2020-21 and Rs 1.59 lakh crore for the fiscal year 2021-22 in order to make up for a portion of the shortfall in cess collection and close the resource gap that has been caused by the delayed release of compensation funds.

The interest cost on the borrowing that took place in 2021-22 has been returned by the Centre to the tune of Rs 7,500 crore, and Rs 14,000 crore is due to be paid during current fiscal year. The repayment of the principal amount is scheduled to begin in 2023-2024 and will continue until March 2026 at the earliest.

The nation began collecting the Goods and Services Tax (GST) on July 1, 2017, and the states were promised reimbursement for the loss of any revenue that may have been caused by the implementation of the GST for a period of five years. The GST was first implemented in the country in 2017.

Even though the protected revenue of the states has been increasing at a compounded growth rate of 14%, the cess collection has not increased in the same proportion, and COVID-19 has further increased the gap between the protected revenue and the actual revenue receipt, including a reduction in cess collection.

The total amount of GST compensation that was due to be paid out to the states up until May 31, 2022 has been disbursed by the Central Government.

Products such as tobacco, cigarettes, hookah, aerated drinks, high-end motorbikes, aeroplanes, yachts, and motor cars would continue to be subject to higher tax rates as a result of the extension of the levy of compensatory cess, according to Rajat Mohan, Senior Partner at AMRG & Associates.

“The extension of the levy of compensation cess, although expected, will continue to impose a burden on the impacted businesses,” said M S Mani, a partner at Deloitte India. “This is especially true for industries like automotive, which need to be encouraged because it is one of the industries that has a multiplier effect on GDP and employment.” “The question about whether or not the states would be reimbursed beyond 5 years may ultimately get determined in the forthcoming GST Council meeting,” said Abhishek Jain, Partner in Indirect Tax at KPMG in India. “The GST Council meeting is scheduled for later this month.”

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