What is GST Compensation Cess?
The GST Compensation Cess is an extra tax on certain luxury and “sin” goods, in addition to the regular Goods and Services Tax (GST). Introduced in 2017, this cess was created to offset any revenue losses that states might face after the GST was implemented.
The revenue collected from this cess goes into a special fund to compensate states. It’s applied to items like high-end cars, tobacco products, pan masala, and aerated drinks. Although the cess was originally set to end in 2022, it was extended to March 2026 to help the government repay loans taken during the pandemic.
What is ‘Next Gen GST’?
The “Next Gen GST” is a proposed overhaul of the current GST system, designed to simplify taxes and boost the economy. Here are the key changes being considered:
- A Two-Slab System: The current four-slab system (5%, 12%, 18%, and 28%) would be simplified into just two main slabs: 5% and 18%.
- Lower Rates for Many Goods: Most items in the 12% and 28% slabs are expected to move to the lower 5% and 18% slabs, respectively. This could make everyday items like packaged food and consumer durables, such as air conditioners and washing machines, cheaper.
- A Special Higher Rate: A new, higher tax rate of 40% is being considered for a small number of items, including tobacco, which aligns with the World Health Organization’s (WHO) push to increase taxes on harmful products.
These reforms are meant to lower prices on common goods, stimulate spending, and streamline the tax system. The government is also looking at new ways to replace the compensation cess, such as introducing specific levies like a “Health cess” on tobacco or a “Clean Energy cess” on coal and luxury cars.