India's GST Council Forms GoM to Review Luxury Tax Post-Cess
GST Council forms GoM to propose tax on luxury, sin, and demerit goods after cess ends in March 2026
New Delhi: In a major move, the goods and services tax or GST Council has set up a 10-member Group of Ministers (GoM), chaired by minister of state for finance Pankaj Chaudhary, which may tweak tax rates in luxury, sin and demerit goods once the compensation cess ends in March 2026. The compensation cess, at present, is levied on luxury items at varied rates with sin and demerit goods taxing over and above the 28 per cent.
The GoM, which includes members from Assam, Chhattisgarh, Gujarat, Karnataka, Madhya Pradesh, Punjab, Tamil Nadu, Uttar Pradesh and West Bengal, will submit its report to the Council by December 31. However, the GST Council Secretariat has hinted in an office memorandum that the terms of reference of the GoM is to make a taxation proposal to replace compensation cess after its abolition.
Generally, the proceeds from the cess were used to compensate states for five years after GST rollout or till June 2022 for a significant revenue loss incurred by them. It is also learnt from sources that after the GoM’s final report submission in this matter, the GST Council may impose additional taxes on luxury, sin and demerit goods, if the GoM declines to levy the cess, which may go further for the legislative amendments in various states.
In 2022, the Council decided to extend the levy till March 2026 to repay the interest and the principal amount of the Rs 2.69 lakh crore worth loan taken in the 2021 and 2022 fiscal years to make good states' revenue loss during Covid years. With just one-and-a-half year remaining for the cess to end, the Council in its 54th meeting on September 9 decided to set up a GoM to decide the future course of the cess.
Currently, the GST is a four-tier tax structure with slabs at 5, 12, 18, and 28 per cent. However, as per GST law, tax of up to 40 per cent can be imposed on goods and services. As per the calculations, the interest and principal of the Rs 2.69 lakh crore loan would be repaid by January 2026. The collection from the compensation cess in February and March 2026 is estimated to be Rs 40,000 crore.