October 19, 2025

GST Compensation Cess

Current Context : The Goods and Services Tax (GST) Council has set up a 10-member GoM, chaired by Minister of State for Finance Pankaj Chaudhary, to decide on the taxation of luxury, sin and demerit goods once the compensation cess ends in March 2026.

ABOUT GST COMPENSATION CESS

GST (Compensation to States) Act, 2017 was enacted to ensure that states are compensated for any loss of revenue due to the implementation of the Goods and Services Tax (GST).

Compensation Cess is imposed on certain goods to generate funds for compensating states for revenue losses.

  • It is levied over and above the 28% GST rate on specific items classified as luxury, sin goods, or demerit goods.

Goods Subject to Compensation Cess:

  • Luxury goods: Items like large cars, high-end motorcycles, and yachts.
  • Sin goods: Products considered harmful to individuals and society, such as tobacco products and aerated drinks.
  • Demerit goods: These include items that are seen as socially undesirable or harmful, like pan masala, coal, and gambling activities.

Compensation Period:

  • The Act initially guaranteed states compensation for a five-year period (2017–2022).
  • Due to revenue shortfalls, the government extended the collection of the compensation cess until March 2026to repay loans taken to cover the compensation gap.
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