Background
Introduced in 2017 to compensate States for GST revenue loss, the Compensation Cess expires on 22 September 2025. While the levy ends, huge unutilised input tax credit (ITC) balances remain in taxpayers’ ledgers, raising the crucial question—will these credits lapse, be refunded, or migrate into the regular GST chain?
Constitutional and Legal Position
Credit once validly availed becomes a vested right, protected under Article 300A (Right to Property). Extinguishing it without justification would violate Articles 14, 19(1)(g), and 265. Judicial precedents like Eicher Motors Ltd. and Samtel India Ltd. recognise that ITC cannot be withdrawn retrospectively. Denying utilisation would therefore amount to unconstitutional confiscation and double taxation.
Council and Administrative Clarity
The 56th GST Council Meeting confirmed phase-out of the cess but remained silent on accumulated credits. CBIC FAQs clarified new slab rates but offered no mechanism for ITC utilisation or refund, leaving businesses uncertain.
Policy Options
- Lapse Credits: Simplifies administration but invites constitutional challenges.
- Allow Migration: Let credits adjust against GST liabilities—legally sound and historically consistent.
- Refund: Costly for the exchequer but equitable for taxpayers.
Sectoral Impact
Industries such as automobiles, tobacco, coal, and exporters hold large cess balances. Lapsing them would distort pricing and violate zero-rating principles for exports.
Key Takeaway
The sunset of Compensation Cess is not just fiscal—it tests the constitutional promise of GST as a fair, seamless, and trust-based system. Allowing migration or refund of credits will uphold legality and cooperative federalism, while lapsing will trigger litigation and erode taxpayer confidence.
Explore the complete article here: https://www.taxmann.com/research/gst-new/top-story/105010000000027239/the-sunset-of-compensation-cess-and-the-road-ahead-a-policy-federalism-and-litigation-perspective-experts-opinion
For easy reference, a PDF copy is included. Your thoughts would be valued.
(The author is a practicing advocate, Co-Founder and Legal Head of RB LawCorp.
He specializes in GST law. Suggestions or queries can be directed to
ashsharma@rblawcorp.in. The views expressed in this article are strictly
personal.)