The maximum permissible goods and services tax (GST) rate is likely to be raised to 60 percent, up from the current 40 percent, to account for the revenue loss arising from the expiry of the compensation cess on April 1, 2026, multiple government sources said.
The group of ministers (GoM) on compensation cess has more or less reached consensus to merge the levy with GST rates — a key step that will ensure that the tax on high-revenue items such as automobiles, tobacco, and aerated drinks remains unchanged even after the cess is withdrawn. “The GoM has more or less reached a consensus to merge the cess with the GST rates,” a government source told Moneycontrol.
“After March 2026, the cess cannot continue. So, rates will have to be increased to maintain the same revenue. An amendment will be needed since the current maximum GST rate that can be levied is 40 percent. This is likely to be raised to 60 percent,” a second government source said.
The GST compensation cess — levied over and above the standard 28 percent rate on selected sin and luxury goods — was introduced to compensate states for revenue losses after the rollout of the tax in July 2017.
With all borrowings under the compensation mechanism expected to be repaid, the cess will be discontinued from March.
At present, the highest slab under GST is 28 percent, and the maximum rate permitted under the law is 40 percent, though it has not been utilised yet. However, the effective tax burden on several items is significantly higher due to the compensation cess.
Compensation cess, which is in addition to the GST, on high-end motor vehicles such as SUVs is at 22 percent. Aerated drinks have a cess of 12 percent.
On tobacco and related products, the cess varies, depending on the type, especially for cigarettes, taking the tax outgo to 55–60 percent.
The cess is calculated on the taxable value of the goods or, in some cases, based on quantity (like for cigarettes).
For instance, SUVs attract 28 percent GST and 22 percent cess, taking the total tax incidence to 50 percent. Cigarettes and other tobacco products have a tax incidence of 55 percent and aerated drinks 40 percent. Technically, cess is calculated on a value basis, not always as a simple addition to the GST rate.
“Once the cess ends, the Centre and states will no longer be able to use it to increase the tax burden on such goods. But to avoid revenue loss, they will need flexibility to raise GST rates. Since the current 40 percent cap will not suffice, a hike in the legal ceiling is necessary,” the source added.
What the law says
The 40 percent cap was introduced through an amendment to the CGST Act in 2018 but remains unused. It refers to the maximum GST rate (combined CGST + SGST or IGST) that can be imposed on any item, excluding the compensation cess.
With the cess set to end, the government will no longer be able to rely on a dual structure (GST + cess) to achieve higher tax on demerit goods. By raising the ceiling to 60 percent, the GST Council will have the legal backing to impose a higher single rate on such items.
“The ceiling needs to be raised not because the current GST rate is under 40 percent but because post-cess, future rates will need to legally go beyond 40 percent to retain current revenue levels,” said a source aware of the development.
While the GoM has reached internal consensus, its recommendation is yet to be submitted to the GST Council, where decisions are taken by consensus. The proposal to amend the GST law to raise the ceiling to 60 percent will have to be discussed by the council, which is chaired by the finance minister and has ministerial representatives from all states, sources said.
