The Central Government has abolished the Goods and Services Tax (GST) Compensation Cess with effect from February 1, 2026, bringing to a close a levy that had been in place since the rollout of GST in 2017. The decision was notified by the Ministry of Finance through Notification No. 03/2025–Compensation Cess (Rate), issued late on Wednesday.

The notification amends the principal Notification No. 1/2017–Compensation Cess (Rate) by substituting the cess rate with “Nil” for all entries in the Schedule, effectively withdrawing the levy across a wide range of goods. The amendment has been issued under Section 8(2) of the GST (Compensation to States) Act, 2017, based on the recommendations of the GST Council, and will come into force from February 1, 2026.

Formal End of a Transitional Levy

At the same time, the Ministry of Finance has formally notified February 1, 2026, as the date from which the GST Compensation Cess will cease to exist altogether. The cess was originally introduced for a limited period of five years to compensate States for any revenue loss arising from the implementation of GST, with a statutory assurance of 14 per cent annual revenue growth.

While the compensation period was originally scheduled to end in June 2022, the unprecedented disruption caused by the COVID-19 pandemic led to a sharp shortfall in cess collections. As a result, the Centre had to borrow funds to meet its compensation commitments to States, with the understanding that the borrowings would be repaid through future cess proceeds.

To facilitate repayment of these loans, the levy was extended beyond 2022 up to 2026, even though the guaranteed compensation period had expired. With the debt repayment cycle now nearing completion, the government has moved to sunset the cess entirely, marking the final chapter of the GST compensation mechanism.

Relief for Businesses and Simplification of GST

The withdrawal of the compensation cess is expected to reduce the indirect tax burden on goods that were subject to the levy, allowing businesses to operate under a simpler and more predictable GST regime. From February 2026, such goods will attract only the applicable GST rate, without any additional cess component.

Industry stakeholders have welcomed the move, noting that it will ease pricing pressures, reduce compliance and accounting complexity, and lower litigation risks linked to cess valuation and classification.

Notification Details

Notification No. 03/2025-Compensation Cess (Rate)

Date: 31/12/2025

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