GST Council agrees to extend compensation cess beyond 2022: Sources

The Goods and Services Tax (GST) Council on Monday approved a proposal to levy compensation cess beyond 2022, sources said.

Compensation cess is levied on items such as new motor cars, aerated drinks, pan masala and tobacco and manufactured tobacco substitutes, including tobacco products, besides coal, briquettes, and similar solid fuels manufactured from coal and lignite, whether or not agglomerated, excluding jet, peat, etc. Rates vary from product to product.

Though the sources did not specify the time till which the cess will continue to be levied, the proposal is to extend it up to two years beyond 2022. Funds mobilised through the compensation cess beyond 2022 will mainly be used to repay borrowings planned during FY2020-21 to meet compensation shortfall. This extension is being considered a precursor to the borrowing option to be exercised, said a source.

The proposal for extension was prepared incorporating the views of Attorney General KK Venugopal. According to an answer given in Rajya Sabha on September 20 by Minister of State (Finance), Anurag Singh Thakur, “A recommendation by the GST Council extending the levy and collection of the cess beyond five years under Section 8(1) of the Act (GST Act), would require a decision by a three-fourth majority of the weighted votes.” It is not yet clear whether the decision was taken by evolving consensus or by voting.

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The AG explained the reason to permit an extension in the duration of the levy and collection of the cess. “This would necessarily imply that where, on account of extraordinary circumstances causing a steep fall in GST revenues and a shortfall in the Fund, the States cannot be paid full compensation during the transition period, the shortfall in the payment of compensation could be made up even after the transition period of five years,” the country’s top law officer said.

Venugopal noted a serious downturn in GST revenues for both the Centre and States on account of Covid-19. As a result, the balance in the GST Compensation Fund is inadequate to pay full compensation to the States, he observed. Now, there are two provisions to deal with this situation. First, is a special rate or rates for a specified period to raise additional resources during any natural calamity or disaster, and the second, is using the unutilised fund in the Compensation Fund. Increase in rates is not possible at this moment, and the surplus in the Compensation Fund has already been distributed to States.

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“So, there is a third option: the GST Council would recommend the continuance of the cess beyond the transition period of five years only in a situation of shortfall during the transition period, which would necessitate the raising of funds for paying the compensation after the five-year period is over,” said Venugopal, while giving details of modalities to be adopted.

The Centre estimates a shortfall of ₹3-lakh crore in GST collection, of which ₹65,000 crore is expected to be bridged by the collection of Compensation Cess. For the remaining ₹2.35-lakh crore, debate continues on who will borrow.

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