GST Compensation Cess Needs New Purpose Post-2026: ICRA

By: Admin
October 08, 2024
Categories: GST Recent News
4 Min Read

Rating agency ICRA has suggested that the GST compensation cess, which is set to expire in March 2026, will need a new purpose if extended beyond this date. The agency proposes that the cess could be re-purposed to support energy transition projects or to bring petroleum, oil, and lubricants (POL) into the GST regime.

The GST compensation cess was originally imposed in July 2017 to compensate states for revenue shortfalls due to the implementation of GST. Its levy was extended until March 2026 to service loans raised during the pandemic to support state GST compensations. According to ICRA, after repaying these loans, a surplus of ₹480 billion is expected by the end of FY2026.

ICRA recommends transforming the cess into a “green cess,” which would finance green infrastructure projects and help meet India’s climate goals. Alternatively, including POL products under GST could offer businesses the opportunity to claim input tax credits, reducing costs and enhancing competitiveness. The cess proceeds could then be used to compensate states for any revenue losses from this transition.

However, the inclusion of POL products under GST would reduce the states’ ability to adjust sales tax rates, affecting fiscal autonomy. Furthermore, state-by-state sales tax variations on POL products would complicate revenue loss compensation. A Constitutional amendment may be required if the cess continues beyond 2026.

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