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Goods and Services Tax (GST), launched in India on 1 July, 2017 is a comprehensive indirect tax for the entire country. GST is charged at the time of supply and depends on the destination of consumption. For instance, if a good is manufactured in state A but consumed in state B, then the revenue generated through GST collection is credited to the state of consumption (state B) and not to the state of production (state A). Due to the consumption-based nature of GST, manufacturing states like Gujarat, Haryana, Karnataka, Maharashtra and Tamil Nadu feared a revenue loss. Thus, GST Compensation Cess or GST Cess was introduced by the government to compensate for the possible revenue losses suffered by such manufacturing states. However, under existing rules, this compensation cess will be levied only for the first 5 years of GST regime – from July 1st, 2017 to July 1st, 2022.
Who are required to collect GST Compensation Cess?
All the taxpayers, except those who export specific notified goods and those who have opted for GST composition scheme, are liable to collect and remit the GST compensation cess to the central government. Subsequently, the central government distributes it to the relevant states.
Which goods feature GST Compensation Cess?
- GST Compensation Cess is applicable on certain notified goods as mentioned in the GST (Compensation to States) Act, 2017. Compensation cess is applicable in addition to regular GST.
- GST Cess is also applicable on imported goods in accordance with section 3 of the Customs Tariff Act, 1975.
GST Compensation Cess Rates of Goods
| Goods | GST Compensation Cess |
| Pan Masala | 60% |
| Un-manufactured tobacco (with lime tube) – featuring a brand name | 65% |
| Un-manufactured tobacco (w/o lime tube) – with brand name | 71% |
| Branded Tobacco refuse | 61% |
| Cheroots and Cigar | Higher amount between 21% or Rs. 4170 per thousand |
| Cigarillos | Higher among 21% or Rs. 4170 per thousand |
| Cigarettes containing tobacco excluding filter cigarettes, of length not more than 65 mm | 5% + Rs.2076 per thousand |
| Cigarettes containing tobacco apart from filter cigarettes, of length more than 65 mm and up to 75 mm | 5% + Rs.3668 per thousand |
| Branded ‘Hookah’ or ‘gudaku’ tobacco | 72% |
| Chewing tobacco (w/o lime tube) | 160% |
| Chewing tobacco (with lime tube) | 142% |
| Pan masala (Gutkha) containing tobacco | 204% |
| All goods, excluding pan masala containing tobacco ‘gutkha’, with brand name | 96% |
| All goods, excluding pan masala containing tobacco ‘gutkha’, not bearing a brand name | 89% |
| 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% |
| Motor cars and other motor vehicles (including station wagons and racing cars) principally designed for the transport of persons (excluding motor vehicles for the transport of 10 or more persons, including the driver) | 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 4000 mm. | 1% |
| Diesel driven motor vehicles of engine capacity not exceeding 1500cc and of length not exceeding 4000 mm. | 3% |
| Motor vehicles of engine capacity not exceeding 1500 cc | 17% |
| Motor vehicles of engine capacity over 1500 cc, popularly known as Sports Utility Vehicles (SUVs) including utility vehicles. | 22% |
Source: Central Board of Indirect Taxes and Customs, Goods and Services Tax. Updated – September 2019.
How is GST Compensation Cess calculated?
GST Cess is calculated on the price of the notified goods before GST. For example, compensation Cess on coal is Rs. 400 per tonne. If you sell a tonne of coal that has a value of Rs. 5,000, GST Cess of Rs. 400 has to be paid. Additionally, GST at the rate of 5% for the same will be Rs. 250. Hence, the total GST liability for the supply of coal will be Rs. 750. However, when the compensation cess ends on July 1st, 2022, the total GST liability will be reduced to just Rs. 250.
Input Tax Credit and GST Compensation Cess
If you are a producer, input tax credit can help you partially reduce GST liability by only paying the difference between the tax already paid on the raw materials of a particular good and that on the final product. In other words, the taxes paid on purchase (input tax) can be subtracted from the taxes paid on final product (output tax) to reduce the final GST liability.
Let’s assume, you are a producer and GST payable on the final product is Rs. 500. However, you had already paid Rs. 300 on the purchase of raw materials, you can claim Rs. 300 as input tax credit and only pay the balance Rs. 200 as GST at the time of supply.
Similarly, the input tax credit can also be claimed on GST Cess paid during the purchase of notified goods. Notably, the input tax credit claimed in such a case can only be utilized for paying the GST Cess and not CGST, SGST or IGST.
How is GST Compensation Cess distributed among the states?
The GST Compensation Cess collected by the central government is distributed to the manufacturing-heavy states to compensate for the possible revenue losses due to implementation of the consumption-based GST regime.
In the following section we will discuss how the manufacturing-heavy states are compensated for the possible losses owing to the consumption and destination driven collection of GST.
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Step By Step Calculation of the Compensation Cess Amount
Step1. Revenue for the FY 2016-17 is considered as the base revenue for the state in consideration.
Step2. Growth rate of the state is assumed to be 14% per annum for the 5 year period over which GST cess is applicable. Based on this, projected revenue for a particular FY that a state could have earned in the absence of GST is calculated.
Step3. Finally, the compensation amount is provisionally calculated and released in every two months during the transition period. This mechanism is currently expected to be in effect till 1st July, 2022.
As per section 7(c) of the GST Act, 2017 the total compensation cess payable to a state in any FY equals the difference between the projected revenue for the FY and actual revenue collected by a State.
If after the end of this transition period, there is any surplus money in the total compensation fund, it will be distributed between the states and the center using an appropriate formula.
Summary
- GST Compensation Cess is levied in addition to regular GST on notified goods, mostly belonging to the luxury and demerit categories.
- It has to be paid by all the taxpayers except those who export the notified goods and those who have opted for the GST composition scheme.
- The collection of GST compensation cess is currently only applicable for the first five years of the GST regime (i.e. till 1st July, 2022) to compensate the manufacturing-heavy states for any possible losses due to the consumption-based nature of GST.
- The compensation cess payable to states is calculated based on the methodology specified in the GST (Compensation to States) Act, 2017.
- The compensation fund so collected is released to the states every 2 months.
- Any unused money from the compensation fund at the end of the transition period shall be distributed between the states and the center as per any applicable formula.