In News:

• GST compensation cess likely to continue beyond January 2026, with potential rebranding and new end-use defined.
• Revenue Collection: Estimated Rs 20,000 crore expected from the cess by February 2026, with recent receipts of Rs 12,068 crore in August 2024.
• Cess Nature: The compensation cess, originally intended for revenue shortfall, cannot merge with the 28% GST slab due to regulatory limitations.

Financial Context

• RBI Study Insights: Weighted average GST rate decreased from 14.4% at launch to 11.6%, now even below 11%, raising concerns among states.
• State Concerns: Many states, including Punjab and Kerala, seek a 2-5 year extension for the compensation period to stabilize finances.

Regulatory Framework

• Cess Legislation: GST Compensation Cess is governed by the Goods and Services Tax (Compensation to States) Act, 2017, initially set for five years.
• Taxpayer Obligations: All suppliers of designated goods/services must collect the cess, except exporters and those under the composition scheme.

Distribution Mechanism

• Calculation of Compensation: Based on projected revenue growth (14%) against actual revenue, with payments distributed bi-monthly.
• Surplus Distribution: Any surplus in the compensation fund post-transition period will be shared between the Centre and states.

Future Considerations

• Ministerial Panel: A panel established by the GST Council will recommend the cess's future and revenue sharing post-compensation.
• Tax Expert Opinions: Some experts argue against pursuing the revenue-neutral rate, suggesting broader tax base expansion instead.
• Revenue Gap Solutions: Options for addressing compensation fund deficits include revising cess formulas, increasing rates, or market borrowing.