Compensation Cess to be Merged into GST, 12% Tax Slab May Be Removed

The GST Compensation Cess is a special tax introduced in 2017 when GST was implemented. Its main purpose is to help states recover the revenue they had lost due to the implementation of GST. This compensation is meant to last for five years from July 1, 2017, or longer if the GST Council decides to extend it. In 2022 (5 years after the introduction of compensation cess), the cess was extended till 2026.

India has been collecting a compensation cess on certain goods like cars, tobacco, and soft drinks for the past 8 years. This cess is charged on top of the regular GST (Goods and Services Tax). As per some sources, the government is planning to merge this compensation cess into the main GST rates once it expires in 2026.

There will be no impact of the integration of compensation cess into GST on the customers. For example, if a car currently has 28% GST plus a 22% cess, after the change, it will just have a higher GST rate that adds up to the same amount. Therefore, this integration will not change prices but will help states get a share of that tax.

Currently, GST is divided equally between the Centre and the states. The states keep all of the state GST (SGST) and get a share of the central GST (CGST) revenue. By merging the cess into GST, the revenue from this tax will be shared more fairly with the state.

Another change the Indian government is planning is to remove the 12% GST slab and shift most items currently in the 12% slab to either the 5% or 18% slab to simplify the GST rate structure.