written by Khatabook | September 29, 2021

What Is Compensation Cess under GST?

What is GST compensation cess? The Goods and Services Tax (GST) Act, 2017 levies the GST compensation cess. This cess came into force from 1st July 2017 along with the GST law. This cess acts as a bridge, connecting the gaps that occurred on the cessation of the prior indirect tax regime. 

With the introduction of GST, there was a  shift to the destination-based taxation model from the former manufacturing-based model at the time of excise law. It means that the revenue will now accrue to the states where the goods or services will get consumed.

This model did not go well with the states that had spent heavily on building the manufacturing plants to increase their indirect tax revenue. This GST cess compensates those states for the loss in revenue for five years. The period of five years can be increased if decided by the GST council.

Collection of the Compensation cess

Suppliers of specified goods and services apart from the exporters are liable to collect the GST compensation cess. Compensation cess is also applicable on certain import items (where Custom Duty is applicable), mostly on the luxury items and demerit categories like alcoholic beverages, tobacco, etc.

It will also include compensation cess chargeable on certain goods imported to India. In case if compensation cess gets paid on exports, the exporter can claim a refund of the same.

No cess shall be applicable on supplies made by a taxable person who has decided to opt for composition levy under section 10 of the Central Goods and Services Tax (CGST) Act.

Goods that get covered under the GST compensation cess

Following is the list of goods that get covered in the GST compensation cess:

Serial Number

Goods

GST Compensation Cess Rate

1

Tobacco that features a brand name with lime tube and is currently unmanufactured.

 

65%

2

Tobacco that features a brand name without lime tube and is currently unmanufactured.

 

71%

3

Tobacco which is branded only

61%

4

Cigar and Cheroots

21% or Rs 4170 per thousand, whichever higher

5

Cigarillos

21% or Rs 4170, whichever is higher

6

Cigarettes featuring tobacco and excluding filter cigarettes, of length not more than sixty-five millimetres.

5% + Rs 2076 per thousand

7

Cigarettes containing tobacco apart from filter cigarettes, of length more than sixty-five millimetres and not exceeding seventy-five millimetres.

5% + 3668 per thousand

8

Cigarettes of tobacco substitutes

Rs 4006 per thousand

9

Branded ‘hookah’ or ‘sudoku' tobacco

72%

10

Chewing tobacco (without lime tube)

160%

11

Chewing tobacco (with lime tube)

142%

12

Pan masala (gutkha) containing tobacco

204%

13

All goods, excluding pan masala containing tobacco ‘gutkha’, with the brand name

96%

14

All goods, excluding pan masala containing tobacco ‘gutkha’, not bearing a brand name

89%

15

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 ton

16

Aerated waters

12%

17

Motor vehicles for the transport of not more than 13 persons, including the driver

15%

18

Motor vehicles, excluding ambulances, three-wheelers, and vehicles of engine capacity not exceeding 1200cc 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%

19

Petrol, liquefied petroleum gas (LPG), compressed natural gas (CNG) driven motor vehicles of engine capacity not exceeding 1200cc and of length not exceeding 4000mm.

1%

20

Diesel-driven motor vehicles of engine capacity not exceeding 1500cc and of length not exceeding 4000mm.

3%

21

Motor vehicles of engine capacity not exceeding 1500 cc

17%

22

Motor vehicles of engine capacity exceeding 1500 cc other than motor vehicles specified against entry at S. No 52B

20%

23

Motor vehicles of engine capacity over 1500cc, popularly known as Sports Utility Vehicles (SUVs) including utility vehicles.

22%

Also Read: Types of GST in India - What is CGST, SGST and IGST?

How to calculate cess on GST?

GST cess is levied on goods' price before the charging of any GST. If the compensation Cess on ovoids is Rs 400 per tonne and the selling price for a tonne of ovoid is Rs 8,000, then GST Cess of Rs. 400 gets attracted. Apart from that, GST at a usual applicable rate will also get attracted.

Let us assume that the value of goods (assessable value) imported to India is Rs 200 and the GST rate is 18%, and customs duty is 10%. If the goods attract GST Compensation Cess, this would be levied on rupees two hundred and twenty, as Compensation Cess is not levied on Integrated Goods and Services Tax (IGST).

The compensation cess on goods imported into India shall be applicable as per section 3 of the Customs Tariff Act, 1975. It will be levied at the point when customs duties are levied on the said goods under section 12 of the Customs Act, 1962, on a value determined under the Customs Tariff Act, 1975. If the goods are exported outside India under bond, it will make the exporter eligible for a refund of cess (input tax) paid at the time of purchase.

The provisions and rules of the CGST Act, 2017 relating to the input tax credit, assessment, short-levy, interest, appeals, penalties will be applicable on the cess of the intra-state supply of goods and services. In the case of inter-State supplies, the IGST Act, 2017 and the Rules made thereunder will apply.

Distribution of GST cess across States

The process of distribution of the GST cess across the states is as follows:

Step 1: Start with the base year revenue computation.

Base revenue = Tax revenue of the state in the Financial year 2016-2017.

Step 2: Assuming a growth rate of 14%, calculate projected revenue for each financial year.

Note: The growth rate of 14% is used to determine the state's revenue had GST not been initiated. Continue with this calculation for five years, which is the transitional period.

Step 3: At the end, calculate the cess payable for each of the financial years as follows

Expected Tax collection for that particular financial year(based on 14% growth)    XXXX

                                                             (-)    Actual Revenue earned by the state    XXXX

                                                             =   Compensation payable to the state    XXXX

After doing this calculation, the amount gets paid to the state. This payment gets released every two months to the states. If the fund has any surplus at the end of the transition period, the same will be distributed between the centre and the state. 

The projected revenue that the State could earn in the absence of the goods and services tax till the end of the relevant two months period will be calculated on a pro-rata basis. This will be a percentage of the total projected revenue for any financial year during the transition period.

In case no compensation is due to be released in any financial year, or if any excess amount is given to a State in the previous year, this amount shall be refunded by the State to the Central Government.

Base Year Inclusions

The following items will get included in the calculation of the base year.

1. Works contract tax, Value Added Tax (VAT), or other taxes collected by the states as per entry fifty-four of the state list of the Constitution of India.

2. Entry tax and other taxes charged by the state government as per entry fifty-four of the state list of the Constitution of India.

3. Excise duty levied on medicinal and toilet preparation. The same gets levied by the State government but collected by the Central government as per article 268 of the Constitution of India.

4. Taxes on luxuries, advertisement.

5. Any cess or surcharge or fee leviable 

Base Year Exclusions

1. Any tax charged under any law as per entry fifty-four of the state list of the Constitution of India on purchase or sale of high-speed diesel, petrol, petroleum crude, natural gas, ATF (aviation turbine fuel), and alcohol meant for human consumption.

2. Any cess levied by the  Government of a state on the sale or purchase of petroleum crude, high-speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel, and alcoholic liquor for human consumption.

3. The entertainment tax levied by the State but collected by local bodies, under any law for the time being in force.

Implication of Cess under GST

There has been a shift from pre-existing consumption-based indirect taxation to destination-based taxation.  Many states opposed such a move. So, the GST compensation cess was invoked by the Central government to address this issue. The manufacturing states will receive funds on account of this cess. Meanwhile, they will change their stance to increasing consumption in their states to raise their indirect tax revenue. This will, in turn, raise the economic growth rate of the country.

Due to the current pandemic situation, the cess collection has been significantly less. As a result, the Central government has not been able to honour its dues to the states. It can either revise the GST cess formula or borrow funds from the market.

Also Read: History of GST in India - Benefits of GST Implementation

Conclusion

On 28th May 2021, a GST council meeting was held. The Central Government proposed borrowing Rupees 1.58 lakh crore to fund the GST compensation cess fund collection shortfall. In the current year, the Central Government expects the cess payment of around three lakh crore, assuming that the economy grows at around 7% per annum. It is the second consecutive time that the cess fund fell short of honouring the payment obligation. The Central Government is even proposing to amend the original cess computation formula to lower its burden. Since it was a constitutionally passed mandate, it is highly uncertain that the  Central Government will succeed in that pursuit. 

We hope from this article; we have been able to clear your doubts regarding the cess rate in GST. Learn more about GST, business and accounting tips and other useful information by downloading the Khatabook app. 

Frequently Asked Questions

1. What is a GST council?

GST Council is the decision-making body under the GST regime. The body comprises the central Finance Minister, the council's chairman, and the state's finance ministers. The Council makes recommendations to the Union and the States. The council reviews all the amendments under the act.

2. What is the Destination Based Taxation model?

Destination based taxation model means that the goods and services get taxed at the place of their consumption and not origin. So the consuming state has the right to levy and collect tax. GST is destination-based taxation, unlike excise and CST.

3. In the case of composition supply of goods, is GST compensation cess applicable?

No. As per proviso under section 8(1) of the GST Compensation Act, cess cannot be levied by a composite dealer.

4. Is Compensation Cess leviable on GST amount or on the taxable amount?

Compensation Cess is leviable on the taxable amount. Hence, if the supply of a particular good is valued at Rs 20 Lakh, GST rate is 18%, and Cess is 15%, the supplier should raise a bill of Rs 20 Lakh along with GST Rs 3.6 lacs and Compensation Cess of Rs 3 lacs. The total bill value will be Rs 26.6 lacs.

5. How is the value of goods or services calculated for the levy of compensation cess?

As per section 8(2), where the cess is chargeable on any supply of goods or services or both, then the value for each such supply shall be determined under section 15 of the CGST Act. This is applicable for both Intrastate and Interstate supplies.

6. Can the input tax credit of Compensation Cess be set off against liability of CGST, SGST/UTGST, or IGST?

As section 11 of the GST Compensation Act, input tax credit in respect of cess on supply of goods and services leviable shall be used only towards payment of said GST cess on supply of such goods.

7. Is GST cess applicable on the sale of old and used Motor vehicles?

At present, there are two notifications on the applicability of GST cess on old and used motor vehicles. The Supply of old and used Motor vehicles is termed as the supply of Motor vehicles as per Entry no. 5 of Schedule, and the compensation cess rate was 15%.

On 25th January 2018, via Notification no. 01/2018, exemption from Compensation Cess has been issued on the supply of all old and used Motor vehicles. Also, no ITC of GST or No ITC of Central Excise duty, VAT, or any other taxes paid is not taken at the time of purchase of such Motor vehicle.

8. Is a dealer of second-hand goods required to pay Compensation Cess on a supply made by him?

Via notification No. 04/2017 of Compensation Cess (Rate) dated 20-07-2017, the levy of cess has been exempted on intra-State procurement of second-hand goods from an unregistered supplier by a registered person dealing in buying and selling of second-hand goods. Provided, they must pay the Cess on the margin basis of computation as per Rule 32(5) of the CGST Rules, 2017.

9. What is the meaning of input-Tax credit?

An input tax credit (ITC) is a tax paid at the time of procurement of goods or services. If you are not a composition dealer, you can set off your GST output with the input at the discharge of tax liability.

10. What is the meaning of composition supply in GST?

The composition scheme is a simple scheme where the assessee does not raise bills as per the usual GST law. They issue the statement of supply in place of the GST bill and pay their GST as a percentage of sales. This rate varies between 1% to 6% depending on the nature of goods/services offered.

11. What are the goods on which the GST compensation cess is levied?

The following are the goods on which GST compensation cess is applicable:

  •     Tobacco
  •     Cigarettes
  •     Motor vehicles
  •     Coal and like solid fuels that get manufactured
  •     Aerated waters

12. Which order is followed in the set-off of GST input?

  • For IGST- First set-off with IGST followed with CGST and SGST
  • For CGST-First setoff with CGST followed with IGST
  • for SGST-First setoff with SGST followed with IGST

13. Is the interest income included while calculating the aggregate turnover?

Yes, the interest income is included while calculating the aggregate turnover, but not the taxable turnover.

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