Everything You Need to Know About GST Compensation Cess

Bio

Shreyansh Singh, an IIT Kanpur alumnus, has eight years of experience in the finance industry. He has spent 5 years at American Express developing mid to long-term strategies for multiple markets including US, Europe and India. Shreyansh currently leads Growth and Strategy initiatives at Pice.

11 Sep 24
10 mins

Shreyansh Singh

08 Mins
11-09-24

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Table of Contents

Who Must Collect GST Compensation Cess?
Which Goods Are Subject to Compensation Cess?
How to Utilise Input Tax Credit (ITC) for Compensation Cess?
How to Calculate Compensation Cess?
How Is Compensation Cess Distributed to the States?
Challenges in Implementing Cess in India
Recent Amendments to the Cess and Their Implications
The Bottom Line

GST Compensation Cess is levied on specific goods and services in addition to GST, with businesses responsible for collecting and remitting it to the central government.
Goods like tobacco, luxury vehicles, and aerated drinks are subject to compensation cess, with varying rates based on product categories.
Input tax credit (ITC) can be used to reduce compensation cess liability, though it cannot be used to offset other GST liabilities like CGST, SGST, or IGST.
The cess is distributed to states to compensate for revenue loss due to the shift to the GST regime, calculated using a projected growth model.
Recent amendments have extended the GST compensation cess till 2026, with revisions to rates on goods like cars and tobacco to support state revenue.

The Goods and Services Tax (GST) is an indirect tax imposed by the government on the supply of goods and services. In addition to GST, a GST compensation cess is levied on specific products, requiring taxpayers to pay an extra amount. Discover who is responsible for collecting this cess and remitting it to the Central Government, as well as the goods that have been subject to this compensation cess since its introduction in 2017.

Who Must Collect GST Compensation Cess?

Excluding exporters and composition taxpayers, all other taxable persons involved in the supply of selected goods and services will collect compensation cess. This will also cover the compensation cess applicable to certain goods imported into India.

However, if a taxpayer pays compensation cess on exports, he/she can claim its refund. The taxpayers collecting compensation cess need to remit it to the Central Government of India, which distributes it to the state governments.

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Which Goods Are Subject to Compensation Cess?

The different goods and their respective cess rates are specified under the GST (Compensation to States) Act, 2017, as amended from time to time, and are detailed below:

Goods	GST Compensation Cess
Cut tobacco	0.14R per unit
Unmanufactured tobacco (with lime tube) – featuring a brand name	0.36R per unit
Unmanufactured tobacco (without lime tube) – with a brand name	0.36R per unit
Branded tobacco refuse	0.32R per unit
Tobacco extracts and essence bearing a brand name	0.36R per unit
Tobacco extract and essence not bearing a brand name	0.36R per unit
Filter khaini	0.56R per unit
Jarda scented tobacco	0.56R per unit
Cheroots and Cigars	21% or ₹4,170 per thousand, whichever higher
Cigarillos	21% or ₹4,170 per thousand, whichever is higher
Cigarettes containing tobacco excluding filter cigarettes, of length not more than 65mm	5% + ₹2,076 per thousand
Cigarettes containing tobacco apart from filter cigarettes, of length more than 65mm and up to 75mm	5% + ₹3,668 per thousand
Filter cigarettes of length (including the length of the filter, the length of the filter being 11 millimetres or its actual length, whichever is more) not exceeding 65 millimetres	5% + ₹2,076 per thousand
Filter cigarettes of length (including the length of the filter, the length of the filter being 11 millimetres or its actual length, whichever is more) exceeding 65 millimetres but not exceeding 70 millimetres	5% + ₹2,747 per thousand
Filter cigarettes of length (including the length of the filter, the length of the filter being 11 millimetres or its actual length, whichever is more) exceeding 70 millimetres but not exceeding 75 millimetres	5% + ₹3,668 per thousand
Cigarettes of tobacco substitutes	₹4,006 per thousand
Cigarillos of tobacco substitutes	12.5% or ₹4,006 per thousand whichever is higher
Smoking mixtures for pipes and cigarettes	290%
Branded ‘hookah’ or ‘gudaku’ tobacco	0.36R per unit
Tobacco used for smoking ‘hookah’ or ‘chilam’ commonly known as ‘hookah’ tobacco or ‘gudaku’, not bearing a brand name	0.12R per unit
Other water pipe smoking tobacco not bearing a brand name	0.08R per unit
Other smoking tobacco bearing a brand name	0.28R per unit
Other smoking tobacco not bearing a brand name	0.08R per unit
Homogenised or reconstituted tobacco, bearing a brand name	0.36R per unit
Chewing tobacco (without lime tube)	0.56R per unit
Chewing tobacco (with lime tube)	0.56R per unit
Preparations containing chewing tobacco	0.36R per unit
Pan masala (gutkha) containing tobacco	0.61R per unit
All goods, other than pan masala containing tobacco ‘gutkha’, bearing a brand name	0.43R per unit
All goods, other than pan masala containing tobacco ‘gutkha’, not bearing a brand name	0.43R per unit
Snuff	0.36R per unit
Preparations containing snuff	0.36R per unit
Coal, ovoids, briquettes, and similar solid fuels manufactured from lignite, coal, whether or not agglomerated, excluding jet, peat (including peat litter), whether or not agglomerated	₹400 per tonne
Aerated waters	12%
Lemonade	12%
Others	12%
Motorcycles with engine capacity exceeding 350 cc	3%
Aircraft (including helicopters, etc.) for personal use	3%
Yacht and other vessels for pleasure or sports	3%
Motor vehicles for the transport of not more than 13 persons, including the driver	15%
Motor vehicles, excluding ambulances, three-wheelers and vehicles of engine capacity not exceeding 1500cc and of length not exceeding 4000 mm, with both spark-ignition internal combustion reciprocating piston engine and electric motor as motors for propulsion or with both compression-ignition internal combustion piston engine [diesel-or semi diesel] and electric motor as motors for propulsion	15%
Petrol, liquefied petroleum gas (LPG) or compressed natural gas (CNG) driven motor vehicles of engine capacity not exceeding 1200cc and of length not exceeding 4000mm.	1%
Diesel-driven motor vehicles of engine capacity not exceeding 1500cc and of length not exceeding 4000mm.	3%
Motor vehicles of engine capacity not exceeding 1500 cc	17%
Motor vehicles of engine capacity exceeding 1500 cc other than motor vehicles specified against entry at S. No 52B	20%
Motor vehicles of engine capacity over 1500cc, popularly known as Sports Utility Vehicles (SUVs) including utility vehicles.	22%

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How to Utilise Input Tax Credit (ITC) for Compensation Cess?

Taxpayers can utilise input tax credit of the cess to reduce the liability of compensation cess arising due to the outward supply of goods and services. In other words, taxpayers can subtract taxes paid on purchases (input tax) from the output tax (taxes paid on finished goods) to reduce their GST liability.

For instance, you are a taxpayer paying ₹400 on raw material purchases with GST payable of ₹600. Then you can claim an input tax credit of ₹400, and pay the remaining ₹200 as outward tax. As a taxpayer, you can utilise ITC to pay GST cess. However, you cannot utilise it to pay CGST, SGST and IGST.

How to Calculate Compensation Cess?

GST compensation cess is an additional amount imposed over and above the GST on goods or services supply. The rate of cess applicable is provided under Section 15 of the CGST Act, 2017, which taxpayers need to pay for selected goods or services supplied.

How Is Compensation Cess Distributed to the States?

The Central Government distributes GST compensation cess to the manufacturing-heavy states. This ensures compensation for loss of revenue due to a consumption-based tax regime implemented at the state level. In accordance with Section 7(C) of the GST Act, 2017, the total compensation payable during a financial year to a state is the difference between the projected and actual revenue that a state collects.

Step-by-Step Guide to Calculating the Compensation Cess Amount

Here are the steps to calculate the compensation cess payable:

Step 1: The revenue for the fiscal year 2016-17 is taken as the base revenue for the state under consideration.

Step 2: A 14% annual growth rate is assumed for the concerned state for a five-year period over which the GST cess applies. With this as the base, the projected revenue for the concerned state is calculated.

Step 3: During the transition period, the compensation amount is provisionally released at an interval of two months.

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Challenges in Implementing Cess in India

Here are the challenges in implementing cess in India:

Complex Calculations

The imposed cess varies based on the tax amount, tax rate, tax base, exemptions, deductions and rebates that might apply to various taxpayers. This makes cess calculation complex and often prone to errors. In addition, cess rates change from time to time, making the calculations complicated.

Compliance Burden

Taxpayers often need to maintain separate records, file returns separately and pay additional dues for the cess. They might need to pay multiple cesses such as health and education cess, coal cess or road and infrastructure cess, which leads to a higher compliance burden for taxpayers. The cost of compliance is high, making it difficult for taxpayers to adhere to tax guidelines.

Refund Mechanism

Cess is a non-refundable payment over and above taxes. This often creates challenges for taxpayers in terms of cash flow management. Exporters, who cannot get a cess refund can be subject to challenges due to cess implementation. Non-refundable cess additionally creates a cascading effect of taxation. This increases the burden of tax on final goods and services due to a levy of cess at multiple stages.

Recent Amendments to the Cess and Their Implications

The GST compensation cess was scheduled to conclude on 30^th June, 2022. However, the Indian government extended it to 31^st March 2026. The objective of the extension is to ensure financial support to the Indian states that have been subject to revenue loss due to GST implementation.

The government adjusted the cess rates on goods like motor cars, tobacco and liquor in Budget 2023-24. It aims to generate revenue amounting to ₹50,000 crore with the newly introduced cess rates. The following are the revised cess rates for a few of the goods:

Goods	Percentage Increase	Revised Cess Rate
Mid-sized Cars	2%	17%
Large Cars	5%	22%
SUVs	7%	25%
Tobacco and Tobacco Products	10%	20%
Liquor	5%	15%

The Bottom Line

The GST compensation cess rates vary significantly based on the products and tax rates. It further varies based on exemptions, rebates and deductions that taxpayers are subject to. As a result, the calculation of cess is complex and often erroneous making it complicated for taxpayers. Adhering to revisions in cess guidelines can help taxpayers comply with the regulations despite revisions in cess rates.

FAQs

What is compensation cess on GST?

Compensation cess is an additional tax imposed on specific luxury or sin goods, such as tobacco, luxury cars, and aerated drinks, in addition to the Goods and Services Tax (GST). It is levied to compensate Indian states for any loss of revenue due to the implementation of GST. The central government collects the cess and distributes it to states based on their projected revenue shortfall.

Can we claim refund of GST compensation cess?

Generally, GST compensation cess is non-refundable. However, exporters can claim a refund of the cess if they have paid it on goods exported from India. For domestic transactions, businesses can use input tax credit (ITC) to offset their compensation cess liability, but they cannot claim a refund unless they are involved in exports.

What is cess under GST list?

Cess under GST is levied on certain goods such as tobacco products, luxury vehicles, aerated waters, and coal. These goods are subject to compensation cess to help state governments recover revenue losses caused by the transition to GST. The specific rates vary depending on the type of product, ranging from fixed amounts per unit to a percentage of the product's value.

Is compensation cess still levied?

Yes, compensation cess is still levied on certain goods. Although it was initially set to end by June 30, 2022, the Indian government extended it until March 31, 2026. The extension was made to ensure that states continue to receive compensation for revenue losses due to the GST regime.

Has GST compensation ended?

No, GST compensation has not ended. The compensation mechanism was extended until March 2026 to allow states to recover revenue losses due to the implementation of GST. This extension is necessary to support states in managing the revenue shortfall caused by the shift from the earlier tax regime to GST.

Is it mandatory to pay cess?

Yes, it is mandatory to pay cess if you are dealing with goods or services that attract GST compensation cess. Businesses involved in the supply of luxury goods, tobacco products, or certain motor vehicles must collect and remit the compensation cess to the government in addition to the standard GST.

What is the full form of cess?

The full form of "cess" is "Cessation", but in taxation terms, it refers to a tax or levy imposed by the government for a specific purpose. Cess is usually an additional tax on top of existing taxes, intended to raise revenue for specific needs such as infrastructure development, health, or education.