# GST Compensation Cess
When GST was introduced, States feared a revenue loss because they were giving up several State-level taxes. The Centre committed to compensate them for any shortfall — funded by a special cess.
## Legal basis
Levied under the Goods and Services Tax (Compensation to States) Act, 2017.
## What does it apply to?
- Applies on specified luxury and demerit (sin) goods — e.g., aerated drinks, pan masala, tobacco, motor cars (above specified engine capacity), coal.
- Charged on the taxable supply value (over and above CGST + SGST/UTGST or IGST).
- Applies to both intra-State and inter-State supplies.
## Who gets the money?
States — to compensate for GST-related revenue loss during the transition.
## The compensation period
- Each State is compensated for 5 years from the date its SGST Act came into force.
- Original sunset date: 30 June 2022.
- The cess itself has been extended up to 31 March 2026 — primarily to service back-to-back loans the Centre took to fund compensation during COVID-19.
## Two timelines to keep separate
| Item | Period |
|---|---|
| State's right to compensation | 5 years from SGST Act's commencement (ended 30-Jun-2022 for most States) |
| Levy of compensation cess | Extended till 31-Mar-2026 (to repay borrowings) |
## Why it matters in exam
Questions often ask both the purpose of the cess and the dates. The most common slip is confusing the compensation period (ended) with the cess period (continues till March 2026).