The compensation cess, which ranges from 11% to 290%, ends in March 2026. The GST Council constituted a group of ministers (GoM) on cess to decide on taxation of luxury, sin and demerit goods after this, ET has learnt.
The 10-member GoM, chaired by minister of state for finance Pankaj Chaudhary, will decide on taxation of luxury, sin and demerit goods after the cess tenure ends, a person familiar with discussions told ET.
“There is no merit in the overall incidence of taxation coming down on demerit or sin goods,” the person cited said, adding that overall rate rationalisation also needs to take this into account.
These are preliminary discussions, the person said, adding that a final view is yet to emerge on the matter. Once firmed up, a report will be presented to the GST Council for a final call.
The council, comprising representatives of the Centre and the states, is the apex GST decisionmaking body.
Compensation cess, imposed on products in the 28% slab, was introduced after the 2017 rollout of GST to cover any shortfall in states’ revenue due to the switchover to the new regime for five years. It was extended in 2022 till March 2026 for the repayment of interest and principal sum on the Rs 2.69 lakh crore borrowing undertaken by the Centre on behalf of states during the Covid period to meet the deficit in the cess fund.
The person cited earlier said there was no case for lowering GST on the items listed above.
Instead, revenue from these items would go toward making up for any loss in moving daily and other essentials from the 12% slab to the 5% one — among the proposals being examined by the GoM. Most pharmaceutical products are in the 12% bracket and shifting them to 5%, for instance, could lead to a revenue loss of Rs 11,000 crore.
“A final decision on taxation on sin goods will be based on what will happen to cess collections be yond 2026,” another official said.
INSURANCE PREMIUMS
The GoM on insurance products, which is meeting next on October 19, is expected to take up suggestions on exempting term insurance products from tax and reducing the rate from 18% on health insurance products.
However, the person said there are concerns that a total exemption would end the flow of input tax credit. There is also a view there should be a cap on the premium amount, if GST exemptions are allowed.
The GoM on rate rationalisation will meet on October 20. There have been discussions on merging slabs, including the 5% and 12% ones. The 18% slab contributes the most to GST collections.
A final view is yet to emerge, with some states not in favour of moving items from 12% to 5% citing revenue considerations, said the person cited above.