Govt May Hike Peak GST Rate to 60% Before Compensation Cess Ends in 2026

India’s maximum Goods and Services Tax (GST) rate may soon be revised to 60% from the current legal cap of 40%, as the government prepares for the discontinuation of the compensation cess from April 1, 2026. According to multiple sources familiar with internal discussions, a Group of Ministers (GoM) on GST compensation has reached near-consensus on merging the compensation cess with GST rates to ensure high-revenue items like automobiles, tobacco, and aerated drinks continue to face the same overall tax burden even after the cessation of the cess. The move would require amending the CGST Act to increase the maximum permissible GST slab, a shift that is now seen as inevitable in order to preserve existing revenue streams from the demerit goods post-cess regime.

Highlights

• Peak GST rate may rise from 40% to 60% post-March 2026.

• Compensation cess to be withdrawn on March 31, 2026.

• GoM favours merging cess into base GST rate to maintain current tax incidence.

• A legal amendment to the CGST Act will be required to enable a rate increase.

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End of Compensation Cess Structure to Prompt Unified GST Rate Hike

The compensation cess—levied atop the 28% GST slab for sin and luxury goods—was introduced in July 2017 to offset state-level revenue shortfalls triggered by the GST rollout. This cess, applicable to items like tobacco, high-end motor vehicles, and aerated beverages, significantly raised the effective tax incidence on such goods, in some cases to as high as 55–60%. With all borrowings under the compensation mechanism expected to be repaid by March 2026, the cess will be legally and structurally phased out. However, in its absence, the Centre and states will lose a crucial lever for raising taxes on demerit goods. The proposal to raise the GST ceiling to 60% is aimed at granting future flexibility to keep tax incidence unchanged despite the structural overhaul.

Highlights

• Cess currently raises effective tax on SUVs to 50%, and tobacco to 55–60%.

• Discontinuation to limit the Centre-state ability to impose a higher tax burden.

• New GST ceiling to allow equivalent rates under single-tax format.

• The move seeks to replicate the cess-era revenue structure under a new design.

Government Sources Confirm Legal Limit Needs Revision for Fiscal Continuity

A second official source affirmed that since the compensation cess cannot continue beyond March 2026, rates must increase to preserve the revenue-neutral position. The current CGST Act allows for a maximum GST rate of 40%, but this cap has never been utilized, primarily because demerit goods were taxed under a dual structure—GST plus cess. Now, to replicate a 50–60% incidence in a single-rate structure post-cess, the ceiling must be lifted. “The ceiling needs to be raised not because GST currently exceeds 40%, but to allow future rates to legally go beyond that threshold,” one senior official explained. The GST Council, chaired by the Union Finance Minister and comprising representatives from all states, will review the GoM’s proposal before any amendments are made.

Highlights

• The legal cap of 40% has remained unused due to the cess mechanism.

• The new ceiling will offer room for future tax structuring on luxury/sin goods.

• GST Council must ratify the proposal before parliamentary amendment.

• The move ensures compliance with existing fiscal and legal norms post-cess.

Compensation Cess Withdrawal Marks End of Dual-Tax Era on Demerit Goods

The 2018 amendment to the CGST Act established the 40% GST ceiling, but most high-revenue items were taxed below this limit with cess added separately. For example, SUVs currently face 28% GST plus 22% cess, resulting in a 50% tax incidence. Cigarettes, depending on type and size, can face a total levy as high as 60%, including quantity-based cess. With the dual structure dissolving in FY26, a single slab GST will be required to match prior total incidence. The GST Council’s legal authority to impose such higher single-rate taxes hinges on a revision of the statutory cap. Industry experts note that this legal modification will be critical in ensuring that the Centre and states can continue levying appropriate taxes on high-consumption, high-harm goods.

Highlights

• Dual structure (GST + cess) enabled high incidence on select goods.

• Cess rates were based on value or quantity, especially for tobacco.

• The unified rate structure post-cess will need legal flexibility.

• A higher ceiling will preserve policy continuity in revenue terms.

Political Consensus and Timing Key as Proposal Moves to GST Council

While the GoM has reached an internal agreement on merging the cess with GST and raising the rate ceiling, the final decision rests with the GST Council. The council, which follows a consensus-based decision-making framework, will review the recommendation in an upcoming meeting. Any subsequent amendment to the CGST Act would require parliamentary approval. With political sensitivities around tax increases—especially those that may impact consumption or inflation—timing and communication of the proposed ceiling hike will be crucial. Officials stress that the higher cap does not imply an immediate rate hike, but is intended purely to preserve status quo revenue from sin and luxury goods once the compensation cess ends.

Highlights

• GST Council to deliberate and decide on GoM proposal.

• Amendment to the CGST Act requires parliamentary clearance.

• No immediate rate hikes planned—move is structural and preemptive.

• Political and fiscal coordination is vital for a smooth transition post-2026.

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