GST compensation cess

IAS Current affairs - GST Compensation Cess

GST compensation cess


  • Union Finance Minister Nirmala Sitharaman on Wednesday stated that the GST Council had already extended the “compensation cess” till March 2026 for helping States repay loans borrowed to make up for shortfall in GST compensation for 2020 and 2021.
  • She made this statement at a press conference in Bengaluru while responding to the demand that the GST compensation by the Centre that ends in June this year should be extended.



  • The adoption of GST was made possible by States ceding almost all their powers to impose local-level indirect taxes and agreeing to let the prevailing multiplicity of imposts be subsumed into the GST.
  • This was agreed on the condition that revenue shortfalls arising from the transition to the new indirect taxes regime would be made good from a pooled GST Compensation Fund for a period of five years that is set to end in June 2022.
  • Citing the impact of the COVID-19 pandemic on the overall economy and more specifically States’ revenues, the States including Tamil Nadu, Kerala, West Bengal, Rajasthan and Chhattisgarh stressed that while their revenues had been adversely impacted by the introduction of GST, the hit from the pandemic had pushed back any possible rebound in revenue especially at a time when they had been forced to spend substantially more to address the public health emergency and its socio-economic fallout on their residents.


What is the compensation fund?

  • This corpus is funded through a compensation cess that is levied on so-called ‘demerit’ goods.
  • The items are pan masala, cigarettes and tobacco products, aerated water, caffeinated beverages, coal and certain passenger motor vehicles.
  • The computation of the shortfall is done annually by projecting a revenue assumption based on 14% compounded growth from the base year’s (2015-2016) revenue and calculating the difference between that figure and the actual GST collections in that year.


How is the deadline extended?
  • The deadline for GST compensation was set in the original legislation and so in order to extend it, the GST council must first recommend it and the Union government must then move an amendment to the GST law allowing for a new date beyond the June 2022 deadline at which the GST compensation scheme will come to a close.

The GST Council has already extended the “compensation cess” up to March 2026 for paying the loan which was taken for all the States in 2020 for the compensation that could not be paid (by the Centre) that year and partially paid in 2021.