Centre Eyes 60% Peak GST Cap as Compensation Cess Nears April 2026 End

Government Mulls Key Amendment to Maintain Revenue on High-Tax Goods

New Delhi, June 17, 2025, 11:59 AM IST – In a major tax policy shift, the government is weighing a hike in the peak GST rate from 40% to 60% to offset revenue losses after the compensation cess ends. The proposal, discussed by the Group of Ministers, could kick in from April 1, 2026.

Background: Cess Set to Expire in March 2026

The compensation cess, which was put in place in July 2017 to make up for the money that states lost after the GST went into effect, is added to the 28 percent GST on certain luxury and harmful goods like cars, carbonated drinks, and tobacco. The cess will end on March 31, 2026, because the Center has finished borrowing money through the compensation mechanism.

Revenue Safeguard: Merger of Cess with GST Rates

To stop revenue from slipping, the GoM has mostly agreed to combine the cess with the GST rates. As of now, SUVs and other similar items are taxed at 28% GST and 22% cess, for a total of 50%. The tax rate on tobacco goods might be as high as 55–60 percent.

“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,” a government source confirmed.

Legal Framework: Raising the Ceiling

The CGST Act was amended in 2018 to allow a maximum rate of 40 percent (combined CGST + SGST or IGST), though this has never been used. With the compensation cess ending, the government seeks to legally empower the GST Council to impose a higher single rate, replacing the dual tax structure.

Sources clarified that the hike to 60 percent is not an immediate rate change, but a legal ceiling that gives flexibility to maintain the current tax burden on demerit goods after the cess ends.

Final Decision Pending Council Approval

While the GoM has reached internal consensus, the recommendation will be formally presented to the GST Council, chaired by the Union Finance Minister and comprising state finance ministers. Any amendment to the GST law requires council approval by consensus.

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