The Goods and Services Tax (GST) Council has initiated a significant step towards the taxation of luxury, sin, and demerit goods by establishing a Group of Ministers (GoM). This 10-member committee, chaired by Minister of State for Finance Pankaj Chaudhary, is tasked with evaluating taxation proposals as the compensation cess is set to conclude in March 2026.
Composition of the GoM
The GoM comprises representatives from various states, including:
- Assam
- Chhattisgarh
- Gujarat
- Karnataka
- Madhya Pradesh
- Punjab
- Tamil Nadu
- Uttar Pradesh
- West Bengal
The committee is expected to submit its report to the GST Council by December 31.
Background of Compensation Cess
Under the GST framework, a compensation cess is levied on luxury, sin, and demerit goods, which is applied over and above the standard 28% GST rate. The cess was initially implemented for five years following the rollout of GST or until June 2022. Its proceeds were utilized to compensate states for revenue losses incurred post-GST implementation.
In 2022, the GST Council decided to extend this cess until March 2026 to repay a loan of Rs 2.69 lakh crore, taken during the fiscal years of 2021 and 2022 to mitigate revenue losses experienced by states during the COVID-19 pandemic.
The Role of the GoM
With only 18 months remaining before the cessation of the compensation cess, the GST Council convened its 54th meeting on September 9, during which the establishment of the GoM was confirmed. The key responsibilities of the GoM include:
- Proposing taxation alternatives to replace the compensation cess after its abolition.
- Deciding whether to maintain the levy as a cess or transition to additional tax.
- If classified as a cess, collections would go to the Centre; if an additional tax, the GoM must recommend rates, necessary slabs, and legislative amendments.
Current Tax Structure
Presently, the GST operates on a four-tier tax structure with rates of 5%, 12%, 18%, and 28%. However, the GST law permits imposing a tax rate of up to 40% on goods and services.
Financial Implications
It is projected that the repayment of the Rs 2.69 lakh crore loan’s interest and principal will be completed by January 2026. The collection from the compensation cess for February and March 2026 is anticipated to reach approximately Rs 40,000 crore. The GST law stipulates that any additional amount collected in the cess pool will be shared equally between the Centre and states.
Future Considerations
The GST Council faces critical decisions regarding the future of the compensation cess. It must determine whether to continue the cess until March 2026 or conclude it by January 2026, depending on the loan repayment schedule. The council will also incorporate the GoM’s recommendations for a new taxation proposal in light of these developments.
Multiple-Choice Questions (MCQs):
- Who is the chairperson of the newly established GoM by the GST Council?
- A) Pankaj Chaudhary
- B) Nirmala Sitharaman
- C) Amit Shah
- D) Arjun Ram Meghwal
Answer: A) Pankaj Chaudhary
- What is the primary task of the GoM regarding the compensation cess?
- A) To abolish GST completely
- B) To propose taxation alternatives after the cess ends
- C) To reduce GST rates
- D) To increase the number of GST slabs
Answer: B) To propose taxation alternatives after the cess ends
- Which states are represented in the GoM?
- A) Kerala, Rajasthan, Bihar
- B) Assam, Chhattisgarh, Gujarat, and others
- C) Maharashtra, Delhi, Goa
- D) Haryana, Jammu & Kashmir, Telangana
Answer: B) Assam, Chhattisgarh, Gujarat, and others
- When was the compensation cess initially scheduled to end?
- A) June 2022
- B) March 2026
- C) December 2023
- D) January 2026
Answer: A) June 2022
- What is the maximum GST rate that can be imposed according to GST law?
- A) 28%
- B) 30%
- C) 35%
- D) 40%
Answer: D) 40%