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Source: The post future of the GST compensation cess has been created, based on the article “Why a grand GST bargain with states is needed” published in “Indian Express” on 23rd September is 2024
UPSC Syllabus Topic: GS Paper 3 – Government budgeting
Context: The article discusses the future of the GST compensation cess, its potential continuation or transformation after March 2026, and how it might be used. It also addresses the possibility of bringing petroleum products under GST and compensating states for revenue losses.
For detailed information on GST Compensation Cess read Article 1, Article 2
What is the GST Compensation Cess?
- The GST compensation cess was created to compensate states for any revenue losses after the implementation of GST, based on a projected annual revenue growth of 14% from the 2015-16 levels.
- It was funded by a cess on specific goods and was meant to last five years, but has been extended to March 2026 due to the financial strains of COVID-19.
- From July 2017 to March 2023, the government transferred Rs 8.8 trillion to states, with Rs 6.1 trillion as grants and Rs 2.7 trillion as loans.
- Ten major states, including Maharashtra and Karnataka, received nearly two-thirds of the total compensation. Some states, like Punjab, heavily rely on this compensation as a significant part of their revenue.
What are the Future Plans for the Compensation Cess?
- The government aims to repay the Rs 2.7 trillion GST compensation loan by January 2026, two months before the compensation cess period ends.
- A surplus of Rs 480 billion is expected after loan repayment and interest payments.
- The GST Council has recommended studying the future of the cess beyond March 2026.
- One option is transforming the cess into a “green cess” to finance environmental projects and India’s energy transition goals for 2030.
- The council will also decide how this new cess would be shared between the Centre and the states.
Will petroleum products come under GST?
- Petroleum, oils, and lubricants (POL) are not currently under GST.
- Including them could help businesses by allowing them to claim input tax credits, thereby reducing costs.
- However, this would also reduce the fiscal autonomy of states, which currently set their own tax rates on these products.
- A significant negotiation would be necessary to include POL under GST, possibly using cess proceeds to compensate states for any losses.
Question for practice:
Examine the potential future uses of the GST Compensation Cess after March 2026 and how it might be transformed.
