• Notification Date: 05-05-2022
• Notification No: N/A

Government to Subsume Sin Goods Cess into GST

The cess that is applied on the aerated drinks, cigarettes, and cars is a matter of bargaining in the Central and State Governments in respect of GST compensation. The discussions within the government indicate that the Central Government has offered to subsume a part of the levy into the GST rate after March 2026. 

It is anticipated that the Central Governments will propose the cess soon. The automobile sector will be subsumed into the GST framework after it expires in 2026. This decision is expected to relieve the states who are worried about their financial position. May states will be suffering from severe financial instability after the compensation period ends in June. Hence, they are demanding for the extension of the compensation period after June to recover their revenue loss.

This extension of the compensation period if taken by the Central Government to subsume the cess into GST will provide the states with half of the revenue as state GST apart from the 41 per cent of the Centre’s GST collections. But the Central Government does not find it to be an acceptable claim raised by the states to extend the compensation period. It has no legal basis of extending the tenure after the completion of the five year period and the Centre is not legally obliged to do so. Moreover, a surge in the GST collection abolishes the requirement of the states to claim more compensation.

The states are raising continuous demands for extending the compensation period beyond June. This issue is to be discussed in the upcoming GST Council meeting and the cess component might get subsumed with the GST framework. Until then, cigarettes and aerated drinks should not be allowed to be charged with the same rates as non-sin goods. The state would gain more revenue if these goods are charged with higher tax rates. This excess revenue can be used by the states as compensation when there is a financial shortfall. GST revenues are collected at high rates which is more than the estimated budget. Hence, the states are not in a position to require further compensation. For the first five years, the states have received their full compensation on the revenue growth at the rate of 14% since the introduction of GST over the base year of 2015-2016.