GST Compensation Cess Extended- Crucial Insights

by Ethan Roberts
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Government Extends Deadline for GST Compensation Cess, Allowing States to Recover from Revenue Losses

GST Compensation Cess Extended

GST Compensation Cess Extended

In a move aimed at assisting states to recover from revenue losses caused by the implementation of Goods and Services Tax (GST) and the COVID-19 pandemic, the Indian government has extended the deadline for the levy of the GST compensation cess until March 31, 2026. Initially planned to terminate on June 30, 2022, the compensation cess will now continue to be collected from July 1, 2022. The decision was made by the GST Council, chaired by Union Finance Minister Nirmala Sitharaman and state finance ministers. This article explores the implications and reasoning behind the decision, as well as the impact on states’ revenue growth.

Implementation of GST

The Central Goods and Service Tax Act came into effect on July 31, 2017, introducing an indirect tax called the Goods and Services Tax (GST) on the supply of goods at every point of sale. This major tax reform resulted in the incorporation of various taxes under the GST and the transfer of authority to levy local-level indirect taxes to the GST Council, comprising the Union Finance Minister and state finance ministers.

Introduction of GST Compensation Fund

To address the revenue losses faced by states due to the implementation of GST, the Constitution (One Hundred and First Amendment) Act, 2016, mandated that the central government compensate the states for a period of five years. The GST (Compensation to States) Act, 2017, specified that the financial year 2015-16 would be the base year for calculating compensation. States were guaranteed a 14 percent annual growth in revenues. To raise funds for compensation, a cess – the compensation cess – was levied on luxury, demerit, and sin goods in addition to the GST.

Government Extends GST Compensation Cess deadline

The recent decision by the GST Council to extend the deadline for the levy of the GST compensation cess until March 31, 2026, aims to address the revenue shortfalls faced by states. The deadline was extended to allow the central government to repay the loans it had taken in the fiscal years 2020-21 and 2021-22 to compensate for reduced revenue collection by states. This extension aligns with the Goods and Services Tax (Period of Levy and Collection of Cess) Rules, 2022, notified by the Finance Ministry. The GST Council’s decision grants states an extended period to recover their economies and bridge the revenue gap caused by the pandemic.

States’ Demand for GST Compensation Extension

Since 2019, several non-BJP-ruled states, including Tamil Nadu, Punjab, Delhi, West Bengal, Chhattisgarh, Kerala, and Rajasthan, have been advocating for a five-year extension of the GST compensation period. As the June 30, 2022 deadline approached, more states joined the demand, with around 12 states officially requesting an extension. The states argue that the introduction of GST and the impact of the COVID-19 pandemic have adversely affected revenue collection, exacerbating the revenue shortfall. They also highlight the slow rate of income growth and rising expenses as contributing factors. The extension of the compensation period aims to address these concerns.

Mechanism of GST Compensation

The GST compensation framework involves multiple steps to calculate and distribute compensation to states. The base year for revenue calculation is 2016-17, and states are guaranteed a 14 percent annual growth in revenue over a five-year period. The compensation amount is released every two months based on this mechanism. However, due to COVID-19 and slower-than-promised cess collection, the revenue gap between the guaranteed revenue and actual revenue has widened, prompting the central government to borrow and provide loans to states to make up for the shortfalls.


The decision to extend the deadline for the levy of the GST compensation cess until March 31, 2026, demonstrates the government’s commitment to supporting states’ recovery from revenue losses. The extension will allow states to bridge the revenue gap caused by the implementation of GST and the COVID-19 pandemic. While concerns remain regarding the compensation period beyond five years, the decision provides much-needed relief to states and paves the way for sustained economic growth and development.

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