What is GST Compensation Cess and How is it Calculated?
GST compensation cess created an efficient mechanism to ensure equitable revenue distribution while supporting creation of a single tax regime for businesses as well as Governments. GST has not only plugged leakages but also brought varied taxation rates in control, increasing the overall ease of doing business.
The GST Compensation cess/ GST cess was introduced by the government of India, enabling manufacturing states to avoid possible revenue loss.GST is calculated based on the destination of consumption. For example, if Goods manufactured in Maharashtra are consumed in Madhya Pradesh, then the GST would be credited to the state where the goods were consumed, i.e., Madhya Pradesh.
However, this caused a rise in speculation for manufacturing states like Maharashtra, Haryana, Tamil Nadu, Karnataka, and Gujarat that they could be staring at a revenue loss due to the nature of GST collection.
What is GST Compensation cess?
The Goods and Services Tax is an integrated indirect taxation system levied on the consumption of goods and services. This is levied based on the destination of consumption and not production. Hence, the states manufacturing goods or services were concerned about the possible revenue loss due to GST. Therefore, the GST Compensation cess was introduced by the government of India to put these issues to rest. The GST Compensation Cess is charged additionally to the GST levied on certain notified goods (the list of notified goods is given below) and is paid by the Central Government to the state of origin of the goods.
The cess will compensate states for any revenue loss they face on GST implementation. This cess, however, will not be paid by those individuals who have opted for a compensation levy.
The GST Compensation cess was to be levied for 5 years from the date of implementation of the GST, i.e., 1 July 2017 to 1 July 2022. The Central Government has recently extended the levy for the GST Compensation cess further by 4 years. The end date is now extended from 1st July 2022 to 31 March 2026.
Who Collects the GST Compensation Cess?
GST compensation cess would be collected by the Central Government, which is paid by all the taxpayers, except those who export certain notified goods and those who have selected to pay tax under the composition scheme. Thus, the Central government will collect the tax and remit it to the various state governments. Further, it would include goods imported to India and the GST cess levied on exports, and then the exporter can claim refunds.
Also Read: Know The GST Rates And SAC Codes Of Different Services
Which Goods Feature under GST Compensation Cess?
The compensation cess GST is levied on specific notified goods which are mentioned in section 8 of the GST (Compensation to States) Act, 2017. This cess in GST is levied in addition to the usual GST. Further, the cess in GST is applied on imported goods mentioned under Section 3 of the Customs Tariff Act, 1975.
GST Compensation Cess Rates of Goods
| Goods GST | Compensation Cess |
| Cut tobacco | 20% |
| Unmanufactured tobacco (with lime tube) – featuring a brand name | 65% |
| Unmanufactured tobacco (without lime tube) – with a brand name | 71% |
| Branded tobacco refuse | 61% |
| Tobacco extracts and essence bearing a brand name | 72% |
| Tobacco extracts and essence not bearing a brand name | 65% |
| Filter khaini | 160% |
| Jarda scented tobacco | 160% |
| Cheroots and Cigar | 21% or 4170 per thousand, whichever higher |
| Cigarillos | 21% or Rs. 4170 per thousand, whichever is higher |
| Cigarettes containing tobacco excluding filter cigarettes, of length not more than 65mm | 5% + 2076 per thousand |
| Cigarettes containing tobacco apart from filter cigarettes, of length more than 65mm and up to 75mm | 5% + 3668 per thousand |
| Filter cigarettes of length (including the length of the filter, the length of filter being 11 millimetres or its actual length, whichever is more) not exceeding 65 millimetres | 5% + Rs. 2076 per thousand |
| Filter cigarettes of length (including the length of the filter, the length of filter being 11 millimetres or its actual length, whichever is more) exceeding 65 millimetres but not exceeding 70 millimetres | 5% + Rs. 2747 per thousand |
| Filter cigarettes of length (including the length of the filter, the length of filter being 11 millimetres or its actual length, whichever is more) exceeding 70 millimetres but not exceeding 75 millimetres | 5% + Rs. 3668 perthousand |
| Cigarettes of tobacco substitutes | Rs. 4006 per thousand |
| Cigarillos of tobacco substitutes | 12.5% or Rs. 4006 per thousand whichever ishigher |
| Smoking mixtures for pipes and cigarettes | 290% |
| Branded ‘hookah’ or ‘gudaku’ tobacco | 72% |
| Tobacco used for smoking ‘hookah’ or ‘chilam’ commonly known as ‘hookah’ tobacco or ‘gudaku’, not bearing a brand name | 17% |
| 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% |
| Homogenised or reconstituted tobacco, bearing a brand name | 72% |
| Chewing tobacco (without lime tube) | 160% |
| Chewing tobacco (with lime tube) | 142% |
| Preparations containing chewing tobacco | 72% |
| Pan masala (gutkha) containing tobacco | 204% |
| All goods, other than pan masala containing tobacco ‘gutkha’, bearing a brand name | 96% |
| All goods, other than pan masala containing tobacco ‘gutkha’, not bearing a brand name | 89% |
| Snuff | 72% |
| Preparations containing snuff | 72% |
| 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 | Rs. 400 per tonne |
| Aerated waters | 12% |
| Lemonade | 12% |
| Others | 12% |
| Motorcycles of engine capacity exceeding 350 cc | 3% |
| Aircrafts (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 | 20% |
| Motor vehicles of engine capacity over 1500cc, popularly known as Sports Utility Vehicles (SUVs) including utility vehicles. | 22% |
How is GST Compensation Cess Calculated?
GST cess is calculated based on the taxable supply value provided in the GST cess rate schedule. According to the GST Act, the value of supply is the price paid or payable for the supply of goods or services, wherein there is no relation between the supplier and the receiver of the supply, and the price of the supplied goods or services is the main consideration. The value of supply is instrumental in deciding upon the GST that needs to be paid in a transaction.
In cases where GST cess is applied on imported goods into India, the cess should be levied and collected along with the IGST (Integrated Goods and Services Tax) and customs duty. The calculation of the compensation cess is based on the prescribed rate of transaction value mentioned under Section 15 of the CGST Act, 2017.
For example, if the value of a particular good imported into India is Rs 10,000, the customs duty is 10%, the education cess is 3%, and the compensation cess is 15%, then the compensation cess under GST would be applicable on Rs 11,030. The compensation cess would therefore be Rs. 1654.5
| Serial | Heading | Value (in Rs) |
| A | Value of the goods | 10,000 |
| B | Customs Duty (10% of A) | 1.000 |
| C | Education cess (3% of A) | 30 |
| D | Total value (A+B+C) | 11,030 |
| E | Compensation Cess (15% of D) | 1,654.5 |
How is GST Compensation Cess Distributed Among States?
Under GST law, compensation cess is distributed by the Central Government to those states that are into manufacturing and therefore facing revenue loss due to GST based on the location of consumption. The criteria for distribution are given below:
- Firstly, the tax revenue for the state in FY 2016-17 is calculated, called the Base revenue.
- The growth rate for the state is assumed to be around 14% per annum for a period spanning 5 years. This is done to calculate projected revenue based on an assumption of how much the state could have earned if the GST was not implemented.
- Finally, the compensation amount is calculated provisionally, and figures are released every 2 months during the transition period. The transition period initially spanned from July 1, 2017, to July 1, 2022 (further extended till March 31, 2026). If there is any surplus, the compensation amount at the end of the transition period is distributed among the Central and the State Governments. The methodology is:
Projected Revenue for that specific Financial Year – Actual Revenue earned by the state = Compensation payable to the state
Input Tax Credit and GST Compensation Cess
Input Tax Credit (ITC) is used to denominate those goods and services businesses use to manufacture finished products for the end consumer. Before GST, businesses were required to pay taxes on input goods and the final product. Under GST, businesses can avoid the liability of paying taxes on both as they need to pay only the difference between the tax on raw material and the tax on the final product.
For example, let us assume that the GST payable on the final product for a business is Rs 5,000. However, the business has already paid Rs. 3,000 to purchase input goods and services (raw materials). This business can now claim Rs. 3,000 as an input tax credit and only needs to pay Rs. 5,000 – Rs. 3,000 = Rs. 2,000 as GST at the time of supply.
As the taxation is centralised under the GST regime, the states would lose out on the tax received from sales of input goods and services. The cess on GST prevents that by ensuring the Central Government compensates the states for the loss.
Also Read: The Complete List of GST State Codes and Jurisdiction
Final Word
The GST Compensation cess is a crucial element of the Goods and Services Act aimed at providing robust manufacturing states with revenue that they would lose due to the default centralised nature of the GST. GST is a consumption-based tax levied on the destination of the goods consumed rather than the place where the goods were initially produced.
In the earlier tax regimes, businesses underwent ‘multiple taxations’. They had to pay tax on both goods and services purchased, produced as well as sold. In addition, there were several taxes such as VAT, Excise, Service Tax, etc. collected individually by both, central and state governments. This made the whole process difficult to account for and caused tax losses for everyone.
FAQs on GST Compensation Cess
Ans: The compensation cess GST was initially levied for a period of 5 years, starting with July 1, 2017 till July 1, 2022. However, very recently the Government of India has extended the duration further by almost 4 years and the duration is now from July 1, 2022, to March 31, 2026.
Ans: The nature of the Goods and Services tax is that it is a consumption-based tax and the tax would be levied upon the destination of consumption and not the destination of production. Hence, key manufacturing states of India were missing out on crucial revenue, that is why compensation cess under GST was brought in to compensate for their loss.
Ans: Previously, there were multiple taxes levied on the consumption of goods, ranging from VAT (value-added tax) to service tax to excise tax, etc. This would also create a cascading tax effect which is the tax levied upon the invoice generated post-application of tax. This caused an increase in the overall tax paid by any consumer which was brought down by implementing GST.
Ans: The components of the GST are:
• CGST (Central Goods and Services Tax): This is the tax collected by the Central Government on the intra-state sale of goods and services.
• SGST (State Goods and Services Tax): This is the tax collected by the state government on the intra-state sale of goods and services.
• IGST (Integrated Goods and Services Tax): It is a tax collected by the central government on the inter-state sale of goods and services.
Ans: GST was initially proposed in the year 2000 by the then central government which set up a committee to draft the law. From there on it took 17 years for the Government of India to finally be able to get it passed in both the houses of the parliament and on July 1, 2017, the GST law was brought into effect.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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