The GST Council has agreed to levy compensation cess for an extended period upto March 2026 to enable the Centre to repay the loans, including principal and interest taken, to compensate states for GST collection shortfall.

As per the GST legislation, states were to be compensated by the Centre for a period of five years till July 2022 for any shortfall in revenue due to GST implementation.

But as the compensation shortfall enlarged during the pandemic, the Centre has borrowed funds to provided it to states as alternate to compensation in FY 21 and more borrowings are expected in FY22.

Briefing media persons about the GST Council decisions, Finance Minister Nirmala Sitharaman said extended levy of compensation cess beyond July 2022 will only be utilised to pay on the loan amount as compensation under legislation is only required to be paid through cess collection.

The Centre borrowed and provided states a sum of about Rs 1.10 lakh crore in FY21 and has provided cash compensation of Rs 75,000 crore this year. More borrowings can take place in FY22, as earlier anticipation of shortfall was about Rs 1.58 lakh crore.