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Indirect Tax Alert - The Government extends GST Compensation Cess till 31 March 2026

27 June 2022

Background and the Amendment

As per the provisions of The Goods and Services Tax (Compensation to States) Act, 2017 (‘the Act’), the Central Government is empowered to levy and collect Compensation Cess on selected supplies and the amount so collected as a Cess would be used for payment of compensation to States for loss of revenue, due to introduction of GST.

The period of such levy, as per the Compensation Cess Act, was originally for 5 years from the date of introduction of GST or the period as may be recommended by the GST Council. Till now, no extension was notified, resulting in the end date of levy of Compensation Cess being 30 June 2022 (i.e. 5 years from 1 July 2017), the date up to which the States are entitled to receive compensation for the shortfall in revenue due to introduction of GST.

The Government has now extended the levy of Compensation Cess for a further period of nearly four years i.e. up to 31 March 2026, by issuing a notification1 of this effect. This will result in a continuation of the levy of the Compensation Cess for nearly four years.

BDO comments

This is in line with the general expectations, considering the public statements from Government officials that the timeline for levy of Compensation cess would be required to be extended to meet the shortfall so far, between the amount of GST compensation cess already paid to States (as per agreed upon increase in revenue) and actual Compensation cess revenue.

It is important to note that States have been demanding an extension of payment of compensation beyond the initial period of 5 years. This may come up for discussion in the 47th meeting of the GST Council, scheduled for 28 and 29 June 2022. Continuation of compensation to states for the further period would be dependent on discussions and decisions in the GST Council meeting since continuation can only be the basis of the recommendation of the Council.

Considering that Compensation Cess is a cost to the end consumers, it is hoped that this levy is phased-out at the earliest. As regards the impact on businesses, they would be required to continue the existing procedures without change until Compensation Cess is eventually phased out.

1Notification no. 1/2022-Compensation Cess dated 24 June 2022