GST Compensation Cess: An Overview
The Goods and Services Tax (GST) revolutionised India’s indirect tax structure. This transformative tax reform aimed to create a unified market and streamline the taxation system across the country. As a part of this mechanism, the GST Compensation Cess was introduced to protect states’ revenue during the initial phase of GST implementation. This article provides a comprehensive understanding of the GST Compensation Cess in India, covering its scope, rates, calculation, utilisation, and other essential aspects.
What is GST Compensation Cess?
The GST Compensation Cess is an additional tax imposed on specific goods and services that fall under the category of ‘sin’ or ‘luxury’ items. Its purpose is to compensate states for any revenue losses they might incur during the first five years of the GST regime. These losses were anticipated due to the subsuming of various indirect taxes that previously contributed to the state’s revenue.
Duration of Compensation Cess
The Cess is being imposed under the Compensation to States Act 2017. It came into effect on 1st July 2017 for a period of five years which ended on 30 June 2022. However, the tax was extended for another five years till 31 March 2026, as per the recent announcement made by the GST council.
Categories of Goods and Services That Come Under GST Compensation Cess
The goods and services subject to GST Compensation Cess are divided into three categories:
- Luxury and Demerit Goods: This category comprises non-essential and harmful items such as tobacco products, aerated beverages, luxury cars, and certain goods that are considered harmful to health or the environment.
- Coal and Lignite: Coal and lignite, used extensively as fuel, are taxed to support the development of renewable energy resources and offset environmental damage.
- Other Goods and Services: This category comprises any other goods or services the GST Council deems necessary for compensation purposes.
Rates of GST Compensation Cess
The GST Compensation Cess rates are variable and determined by the GST Council. The cess is applied in addition to the regular GST rate applicable to the specified goods and services. The rates may change over time based on economic conditions and the GST Council’s decisions.
| Name of Goods or Service | GST Cess |
| Aerated Products | |
| Aerated Waters | 12% |
| Lemonade | 12% |
| Others | 12% |
| Tobacco and Tobacco Products | |
| Unmanufactured Tobacco without a brand name | 65% |
| Branded Tobacco Refuse | 61% |
| Chewing Tobacco (without lime tube) | 160% |
| Chewing Tobacco (with lime tube) | 142% |
| Filter Khaini | 160% |
| Jarda scented Tobacco | 160% |
| Pan Masala containing Tobacco ‘Gutkha’ | 204% |
| Pan Masala | 60% |
| Cigarettes | |
| Non-Filter – Not Exceeding 65mm | 5% + Rs.1591 per thousand |
| Non-Filter – More than 65mm and Less Than 70mm | 5% + Rs.2876 per thousand |
| Filter – Not Exceeding 65mm | 5% + Rs.1591 per thousand |
| Filter – More than 65 mm and Less Than 70mm | 5% + Rs.2126 per thousand |
| Filter – More than 70 mm and Less Than 75mm | 5% + Rs.2876 per thousand |
| Others | 5% + Rs.4170 per thousand |
| Other Tobacco Products | |
| Cigars, Cheroots, Cigarillos | 21% or Rs.4170 per thousand, whichever is higher |
| Cigarettes made of Tobacco substitutes | Rs.4006 per thousand |
| Cigarillos made of Tobacco substitutes & Other Products | 12.5% or Rs.4006 per thousand, whichever is higher |
| Branded ‘hookah’ or ‘gudaku’ Tobacco | 72% |
| Unbranded ‘hookah’ or ‘gudaku’ Tobacco | 17% |
| Unbranded Smoking Tobacco | 11% |
| Smoking mixtures for pipes and cigarettes | 290% |
| Branded other smoking tobacco | 49% |
| Unbranded other smoking tobacco | 57% |
| Branded Homogenised or reconstituted tobacco | 72% |
| Snuff & Preparations Containing Snuff | 72% |
| Branded Tobacco extracts and essence | 72% |
| Unbranded Tobacco extracts and essence | 65% |
| Cut Tobacco | 20% |
| Branded goods, other than pan masala containing tobacco ‘gutkha’ | 96% |
| Unbranded goods, other than pan masala containing tobacco ‘gutkha’ | 89% |
| Coal & Others | |
| Coal and Briquettes | Rs.400 per tonne |
| Lignite, except jet | Rs.400 per tonne |
| Peat | Rs.400 per tonne |
| Motor Vehicles | |
|
15% |
|
3% |
| Small Cars (length < 4 m, Petrol < 1200 cc ) | 1% |
Who Collects and Disburses the Compensation Cess
The central government collects the GST Compensation Cess, but its entire proceeds are allocated exclusively for compensating states. The cess is collected over and above the GST rate applicable to the goods and services falling under the specified categories. The funds collected are then distributed among the states based on a predetermined formula.
How is Compensation Cess Calculated
The government will calculate the difference between a state’s actual revenue from GST and the projected revenue it would have earned under the previous tax regime. If this difference is negative, the state is entitled to receive compensation from the funds collected through the GST Compensation Cess.
Input Tax Credit on GST Compensation Cess
Input tax credit (ITC) is not available for GST Compensation Cess. Unlike the regular GST paid on inputs, the GST paid on the cess cannot be claimed as a credit while discharging the output tax liability. This means that businesses cannot set off the GST Compensation Cess paid on purchasing goods or services against their GST liability on the supply of other goods or services.
Composition Scheme and Compensation Cess
Taxable persons who have opted for the composition scheme are exempt from paying the GST Compensation Cess on their supplies.
Compensation Cess on Imports and Exports
The compensation cess on imported goods is levied and collected as per the provisions of the Customs Tariff Act 1975 when customs duties are imposed on the said goods. However, exporters of goods under bond are exempt from the compensation cess, and they are eligible for a refund of the input tax credit related to the exported goods.
Utilisation of GST Compensation Cess
The proceeds from the GST Compensation Cess are exclusively utilised for compensating states for any revenue losses incurred during the decided period. The compensation amount is calculated based on a predetermined formula and paid to the states regularly to address any revenue shortfall.
FAQs
Are the regular GST laws and rules applicable to the GST Compensation Cess?
Yes, the provisions of the Central Goods and Services Tax Act, 2017, and the relevant rules apply to the levy and collection of the GST Compensation Cess on intra-state supplies. For inter-state supplies, the Integrated Goods and Services Tax Act and its related rules are applied.
What is the purpose of GST Compensation Cess?
The primary purpose of GST Compensation Cess is to compensate states for any revenue losses they might face during the initial years of GST implementation. It ensures that states' finances are protected during the transition to the new tax regime.
Is the GST Compensation Cess applicable to services?
Yes, GST Compensation Cess can be levied on the supply of goods and services or services alone.
Can the GST Compensation Cess be passed on to customers?
Yes, businesses are allowed to pass on the GST Compensation Cess to their customers. It is considered part of the overall tax liability on the goods or services supplied.
Are all states eligible to receive compensation under GST Compensation Cess?
All states and Union Territories with legislatures are eligible to receive GST Compensation Cess, subject to certain conditions and criteria set by the GST Council.
Are the GST Compensation Cess rates different for different states?
No, the rates of GST Compensation Cess are uniform across all states and Union Territories.