The Goods and Services Tax Council, which meets September 3–4, is likely to deliberate ending the compensation cess by October 31, ahead of the deadline, as loans raised during the pandemic years approach full repayment, government sources said.
The deadline for the cessation of the GST compensation cess is March 31, 2026 but discussion are underway to end the cess collection earlier, as the repayment of loans raised during the COVID-19 pandemic years to compensate states for revenue shortfall nears completion.
Government sources suggested the cess could cease by this October 31, leaving a surplus of approximately Rs 2,000-3,000 crore to be distributed equally between the Centre and the states .
“Though the GST Council had earlier approved cess collection until March 31, 2026, the repayment is likely to be completed around October 18–19. The proposal is to continue the levy till the end of October for smooth processes. This may leave a surplus of about Rs 2,000-3,000 crore in the cess kitty, which will be shared equally between the Centre and the states,” a government source told Moneycontrol.
According to law, the cess was mandated only for five years for compensation. “Since the repayment of loans to meet that commitment will end, we cannot collect it further,” the source added.
Another senior government source confirmed that once the repayment is done, the legal mandate for cess collection expires.
“The cess will stop immediately as per law. There is no extra kitty beyond what gets collected till October-end. Whatever balance remains will then be distributed,” he added.
Since the compensation cess levy was extended post-2022 to service pandemic-era loans, collections have remained substantial.
The compensation cess, introduced in July 2017, was designed to make up for state revenue losses during the initial five years of GST implementation. The legal window for compensation ended in June 2022, the levy was extended until March 2026 to service loans raised during the pandemic years when revenues sharply declined.
The cessation of the compensation cess collection by October 31, 2025, aligns with the legal framework established under the Goods and Services Tax (Compensation to States) Act, 2017.
During COVID-19, the Centre provided states Rs 1.1 lakh crore in FY 2020-21 and Rs 1.59 lakh crore in the next year as loan to cover the shortfall in GST compensation due to pandemic-related revenue losses. This sum of Rs 2.69 lakh crore was borrowed by the Centre on behalf of the states and then passed on to them as loans to help manage their finances.
