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Repaying borrowed sum from market to clear GST shortfall of states during Covid on Centre’s agenda

Any move to continue with cess after 2025-26 is likely to be opposed by industry, which can pass on benefits to consumers in form of price cut

R. Suryamurthy New Delhi Published 01.04.24, 11:08 AM
Representational image

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The robust collections from the goods and services tax have put the Centre in a position to repay in advance the huge sums it borrowed from the market to clear the GST shortfall of states during the Covid period, according to finance ministry estimates.

After borrowing Rs 1.1 lakh crore in 2020-21 and Rs 1.59 lakh crore in 2021-22 on behalf of states and using the GST compensation cess to repay the lenders, the Centre is now grappling with the future of compensation cess after it expires in 2025-26.


Any move to continue with cess after 2025-26 is likely to be opposed by industry, which can pass on the benefits to consumers in the form of a price cut.

The next meeting of the GST Council, likely to be held after the new government at the Centre is formed, has to take a call on cess.

As the cess sum is not shared with states, they could also oppose it.

In any case, it cannot continue in its present form as it was introduced to compensate the states for revenue loss through a constitutional amendment.

Either it lapses or any change has to be done through an amendment.

Finance ministry officials pointed out the possibility of amendments to let the cess regime continue after 2025-26 in some other form.

The industry could lobby to push for discontinuation to make the products cheaper and benefit the consumers, kicking off a consumption-led growth which will generate higher revenues.

The compensation cess is levied on products considered as sin or luxury goods
and includes tobacco products, soft drinks and motor vehicles.

With sales boosted by SUVs, the automakers will lobby hard against the cess to make the vehicles attractive and more affordable, the source said.

Similarly, sources said there would be debate on the concept of luxury products or sin goods when it comes to aerated water, lemonade and caffeinated beverages. The cess is imposed over and above the highest GST rate of 28 per cent.

Tobacco products have borne the brunt of the levy: a cess of 72 per cent is levied on ‘hookah’ tobacco, 290 per cent on the smoking mixture for pipes and
cigarettes, 142 per cent on chewing tobacco with lime tube, 204 per cent on pan masala containing ‘gutkha’ tobacco and 5 per cent plus Rs 2,076 per thousand on filter cigarettes of length not exceeding 65 millimetres

Other items such as pan masala attracts 60 per cent cess. Aerated water, lemonade and caffeinated beverages attract 12 per cent cess and different types of motor vehicles, from 1 per cent to 22 per cent.

Dues details

The repayment schedule of the Covid borrowing envisages payment of Rs 55,104 crore in 2025-26 and Rs 1.36 lakh crore in 2026-27, while no repayment has been scheduled in 2024-25.

The interim budget has proposed as much as Rs 1.24 lakh crore collected as cess in 2024-25 to be used for repayment, leaving Rs 67,500 crore to be paid off in 2025-26.

Actual cess collections projected for 2024-25 is Rs 1.5 lakh crore, which is estimated to go up higher in 2025-26, given the projected growth of 3.4 per cent in collections.

One estimate has projected the government could be left with more than Rs 50,000 crore after paying back all the loans.

The total GST collection in the current fiscal till February stands at Rs 18.40 lakh crore, 11.7 per cent higher than the mopup for the same period last fiscal.

The average monthly gross collection for the current fiscal stood at Rs 1.67 lakh crore, exceeding Rs 1.5 lakh crore in the last fiscal.

“Collections in February were Rs 1,68,337 crore, marking a robust 12.5 per cent increase compared with the same month in 2023,” the finance ministry said.

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