The GST Council, meeting in New Delhi on September 3-4, is likely to consider ending the GST compensation cess by October 31, 2025, well before the official deadline of March 31, 2026, government sources indicated.
The cess, originally imposed in July 2017 to offset revenue losses faced by states during the first five years of GST, was legally mandated to end in June 2022. However, it was extended until March 2026 to help the Centre repay loans raised during the COVID-19 pandemic years, when revenues sharply declined.
Loan Repayment Nears Completion
Sources said that the repayment of pandemic-era loans Rs 1.1 lakh crore in FY21 and Rs 1.59 lakh crore in FY22, borrowed by the Centre on behalf of states, will be completed around October 18-19, 2025. Once the repayment obligation ends, the cess can no longer be levied under the GST (Compensation to States) Act, 2017.
"Though the Council had earlier approved cess collection until March 31, 2026, repayment will be completed by October 2025. Extending it until October 31 allows smooth closure, which may leave a surplus of Rs 2,000-3,000 crore. This balance will be shared equally between the Centre and the states," a government source mentioned.
Another senior official confirmed, "The cess will stop immediately as per law once repayment is done. There is no extra kitty beyond what is collected till October-end."
Background of the Cess
The compensation cess was levied on items such as luxury cars, aerated beverages and tobacco products. Its primary purpose was to provide states with assured revenue growth of 14% per annum for the first five years of GST. When collections fell short during the pandemic, the Centre borrowed Rs 2.69 lakh crore on behalf of states to bridge the gap.
Since then, cess collections have been earmarked exclusively for debt servicing. With repayments nearly complete, officials argue there is no legal basis to continue collecting it.
Implications for the Centre and States
If approved, this move would mark the early termination of GST compensation cess collection, a significant development in India's indirect tax framework. Analysts suggest the step will provide relief to consumers and industries, while also signalling fiscal consolidation as the Centre winds down extraordinary pandemic-era borrowing support.
The GST Council, chaired by Union Finance Minister Nirmala Sitharaman and comprising state finance ministers, will take the final call. Traditionally, Council decisions are unanimous, making early cessation highly likely if consensus is reached.
CAclubindia
