With the impending expiry of the Goods and Services Tax (GST) compensation cess on March 31, 2026, the government faces a critical decision between consumer relief and revenue augmentation. The cessation of cess collections, coupled with the repayment of back-to-back GST loans, poses a complex challenge for the Centre.
Consumer Benefit vs. Revenue Filling
Upon the cessation of the compensation cess, prices of goods subject to the cess are expected to decrease, benefiting consumers. However, discussions have surfaced regarding the potential reimagining of the cess as an additional revenue source post-2026, albeit requiring legal amendments due to its current earmarked purpose.
Complex Decision-Making Process
Any decision regarding the future of the compensation cess would necessitate consensus within the GST Council and likely require constitutional amendments. Moreover, the sensitive nature of tax revenue-sharing among states adds complexity to the process.
Potential Repurposing Options
Economists propose repurposing the cess as a Pigouvian levy on goods with negative externalities, such as tobacco and carbon, to address health and climate concerns. Additionally, the government could consider an early cessation of the cess if loans are repaid ahead of schedule.
Financial Implications
The government aims to prepay GST loans using cess collections, potentially leaving a surplus. However, allocating this surplus between the Centre and states poses another challenge, with various options under consideration.
While the resolution of the compensation cess issue may not be an immediate priority, given the timeline until 2026, early deliberations and consensus-building are essential to ensure a smooth transition and address the interests of both consumers and the exchequer.
