GST Compensation Cess

As we know, the Goods and Services Tax (i.e., GST) is a consumption-based tax. Due to this many manufacturing States will obviously face a loss of revenue. Consequently, ‘GST Compensation Cess’ is levied as per provisions of section 8 of the Goods and Services Tax (Compensation to States) Act, 2017. 

Accordingly, the Goods and Services Tax (Compensation to States) Act, 2017 was introduced with an aim to provide ‘compensation’ to the States towards loss of revenue arising due to the implementation of the Goods and Services Tax.

Compensation Cess is levied on specified goods belonging to demerit categories like Motor vehicles; Aerated water; coal, briquettes and solid fuels; tobacco and tobacco products; etc.

In the present article we will look into all the provisions governing Compensation Cess i.e., treatment and levy of Compensation Cess under GST; list of notified goods and services and rates thereof of Compensation Cess; value to be adopted for calculation of Compensation Cess; input tax credit vis-à-vis Compensation Cess; manner of distribution of Compensation Cess to the States and extension of levy of Compensation Cess.

GST Compensation Cess : Treatment and levy in GST

GST Compensation Cess features

According to provisions of section 8(1) of the Goods and Services Tax (Compensation to States) Act, 2017, ‘Compensation Cess’ is levied on –

  • Inter-State supplies of notified goods and services; and
  • Intra-State supplies of notified goods and services.

Important Features of Compensation Cess

  • Compensation Cess is payable by all the registered taxable person under GST who are engaged in supplying notified goods or services;
  • Only Exporters as well as GST Composition Scheme dealers are excluded from the payment of Compensation Cess under GST;
  • Compensation Cess is levied in addition to the normal GST payable on notified goods or services;
  • The Compensation Cess under GST is calculated on the amount before GST. Meaning thereby that Compensation Cess is not payable on the amount of GST;
  • As of now, Compensation Cess is applicable for the first five years of implementation of GST i.e., till 30th June 2022;
  • The States are compensated, out of the Compensation Cess under GST, by the Centre at the interval of every two months.

What Goods are Covered under Compensation Cess?

Cess in GST goods list

Based on provisions of section 8(2) of the Goods and Services Tax (Compensation to States) Act, 2017 –

  1. Notification no. 1/2017- Compensation Cess (Rate) dated 28th June 2017, as amended, covers the rates of Compensation Cess of notified goods; whereas,
  2. Notification no. 2/2017- Compensation Cess Rate in GST dated 28th June 2017, as amended, covers the rates of Compensation Cess of notified services.
  3. The following table summarizes the applicable Cess rate in GST notified goods and notified services for ready reference –

Notified goods/ notified services

Rates of Compensation Cess

Pan Masala

60%

Aerated Waters

12%

Lemonade

12%

Unmanufactured tobacco – without lime tube (bearing a brand name)

71%

Unmanufactured tobacco – with lime tube (bearing a brand name)

60%

Tobacco refuse (bearing a brand name)

61%

Cigar & Cheroots

Higher of –

  • 21% or
  • INR 4,170 per thousand

Cigarillos

Higher of

  • 21% or
  • INR 4,170 per thousand

Cigarettes containing tobacco (other than filter cigarettes of length up to 65 millimeters)

5% + INR 2,076 per thousand

Cigarettes containing tobacco (other than filter cigarettes of length more than 65 millimeters up to 75 millimeters)

5% + INR 3,668 per thousand

Chewing tobacco – without lime tube

160%

Chewing tobacco – with lime tube

142%

‘Hookah’ or ‘gudaku’ tobacco (bearing a brand name)

72%

Pan masala (‘Gutkha’) containing tobacco

204%

All goods (other than pan masala containing tobacco ‘Gutkha’) bearing a brand name (falling under chapter 2403 99 90)

96%

All goods (other than pan masala containing tobacco ‘Gutkha’) not bearing a brand name (falling under chapter 2403 99 90)

89%

Coal, ovoids, briquettes, and similar solid fuels which are manufactured from coal, lignite whether or not agglomerated (excluding jet, peat but including peat litter)

INR 400 per tonne

Cut tobacco

20%

Tobacco extracts and essence (bearing a brand name)

72%

Tobacco extracts and essence (not bearing a brand name)

65%

Jarda scented tobacco

160%

Filter khaini

160%

Filter cigarettes of length up to 65 millimeters (it includes the length of the filter which is higher than 11 millimeters or actual length)

5% + INR 2,076 per thousand

Filter cigarettes of length more than 65 millimeters up to 70 millimeters (it includes the length of the filter which is higher than 11 millimeters or actual length)

5% + INR 2,747 per thousand

Filter cigarettes of length more than 70 millimeters up to 75 millimeters (it includes the length of the filter which is higher than 11 millimeters or actual length)

5% + INR 3,668 per thousand

Smoking mixture for pipes & cigarettes

290%

Cigarettes of tobacco substitutes

INR 4,006 per thousand

Cigarillos of tobacco substitutes

Higher of

  • 12.50% or
  • INR 4,006 per thousand

Other water pipe smoking tobacco (not bearing a brand name)

11%

Other smoking tobacco (bearing a brand name)

49%

Other smoking tobacco (not bearing a brand name)

11%

Tobacco used for ‘hookah’ ‘smoking’ or ‘chilam

17%

Homogenized/ reconstituted tobacco (bearing a brand name)

72%

Snuff

72%

Preparation containing snuff

72%

Others (falling under chapter 2202 10 90)

12%

Motorcycles of engine capacity more than 350 cc.

3%

Aircraft, helicopter, airplane for personal use

3%

Yacht and other vessels either for sports or for pleasure

3%

Motor vehicles for the transport of 13 persons or less (including driver)

15%

Motor vehicles with the engine capacity up to 1500 CC

17%

How to Calculate Compensation Cess with Example

GST Compensation Cess Calculation

The value on which Compensation Cess will be levied is explained in the table below –

Particulars

Value for calculating
Compensation Cess

Inter-State supplies or Intra-State supplies of notified goods or services

Value as determined under section 15 of the Central Goods and Services Tax Act, 2017.

Import goods

Value as determined under the Customs Tariff Act, 1975.

Let us understand the value to be adopted for the calculation of Compensation Cess with the help of an example –

Suppose, notified goods worth INR 1,000 is imported into India. Customs duty payable on the same is 10% and GST payable on the same is 18%. Accordingly, -

  • Assessable/ transaction value = INR 1,000
  • Basic Customs Duty @10% = INR 100
  • Value for levying IGST = INR 1,100
  • IGST payable @18% = INR 198

The value to be adopted for the calculation of Compensation Cess will be INR 1,100. It is important to note that Compensation Cess GST is to be calculated on the value before GST. Cess is not levied on IGST.

Input tax credit vis-à-vis ‘Compensation Cess in GST’ –

The input tax credit of the Compensation Cess in GST paid is available. However, as per proviso to section 11(2) of the Goods and Services Tax (Compensation to States) Act, 2017, one is allowed to utilize the said GST input tax credit only against payment of Compensation Cess towards outward supplies of notified goods or services.

How will the Compensation Cess be Distributed to the States 

The compensation amount which is to be distributed to each State is calculated on the basis of the following tabulated steps –

Steps

Formula

STEP 1

Base revenue [which is equal to State Tax revenue in the Financial Year 2016-2017]

STEP 2

Calculate projected revenue for each Financial Year [assuming a growth rate of 14%].

STEP 3

Calculate compensation payable for each Financial Year by the following formula –

Projected revenue as calculated at STEP 2 for particular Financial Year                            (XXX)

(Less) Actual revenue earned by the respective State      (XXX)

Amount of compensation payable to the State                  (XXX)

It is important to note here that the ‘projected revenue’, calculated at STEP 2, implies that this would be the revenue for each Financial Year which the State would have earned if the GST was not implemented.

Such projected revenue is to be calculated for a period of five years, as the Compensation Cess in GST is to be in effect for the transition period of five years.

Notably, any surplus of the Compensation fund, at the end of the transition period of five years, will be distributed amongst the States and the Centre on the basis of an appropriate formula.

Extension of levy of Compensation Cess –

As stated above, the levy of Compensation Cess is effective for five years from the implementation of GST. Accordingly, the levy of Compensation Cess in GST will not be effective from 1st July 2022.

It is noted that many States are urging the Centre to extend the levy of Compensation Cess for more period of five years. Henceforth, the urging States are keeping an eye on the 47th GST council meeting which is likely to be held on 28th or 29th June 2022.

Compensation Cess : Provisions

  • Compensation Cess is introduced to compensate the State facing loss of revenue on account of implementation of GST.
  • Compensation Cess is effective for a period of five years i.e. till 30th June 2022. However, many States are urging Centre to extend the said period for further five years.
  • Compensation Cess is levied as per provisions of section 8 of the Goods and Services Tax (Compensation to States) Act, 2017.
  • Compensation Cess is payable on notified goods or services.
  • Compensation Cess is payable on the value before GST.
  • GST Input tax credit of Compensation Cess is available. However, it can be utilized for payment of Compensation Cess on outward supplies of notified goods or services.

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CA Poonam Gandhi

About the author

Poonam Gandhi is a Chartered Accountant and a Lawyer. She is a Professional Freelance Content Writer/ Editor and an Educator.

She masters in creating result-oriented as well as Search Engine Oriented Content. Currently, she is associated with some of the topmost leading sites of India.

She holds more than 3 years of experience in the content field. Before entering the content writing field, she possessed a wide practice experience of more than 9 years, specifically, in the field of Indirect Taxation.

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