Luxury cess may fold into GST, 12% slab likely to go
After eight years of piggybacking on India's goods and services tax (GST), the compensation cess levied on sin goods and luxury items may be finally integrated into GST levied on these items.
According to two people familiar with discussions in the GST Council, the Union finance ministry is willing to integrate the cess on items like cars, tobacco and aerated drinks into their GST rates. The cess, levied on top of the GST rate, was originally intended to compensate states for potential revenue loss due to the transition to GST. In 2022, it was extended till March 2026 to repay central loans taken to support states during the pandemic.
“The central government backs the integration of the compensation cess into the GST rate structure, which will help boost states’ revenue receipts," said the person quoted above.
Collection of the cess, which is expected to fetch ₹1.67 trillion this year, ends in March.
If the cess is integrated into GST, it will have no effect on the consumer; for eg., an SUV of certain specifications, which currently attracts 22% cess in addition to 28% GST, will have a higher GST rate.
However, under GST, the Centre and states collect taxes equally as central GST (CGST) and state GST (SGST). While the states get to keep all of the SGST, the Centre shares a significant portion of its collection with the states. If the cess is integrated into GST, some of it comes back to the states, under a tax-sharing formula set by the Finance Commission.
At present, the Centre shares 41% of its tax revenue to the states. In October, the Sixteenth Finance Commission (SFC) led by Arvind Panagariya is expected to recommend the formula for the next five years starting FY27. If the GST Council decision on compensation cess is not ready by the time SFC finalizes its report, the Centre may give SFC more time to accommodate the Council’s decision once it is made, the second person quoted above said.