The Goods and Services Tax (GST) was introduced in 2017 to replace a myriad of indirect taxes and make compliance easier. While GST helped eliminate the cascading impact of taxes, it also compromised the state’s revenue from taxation. The GST Compensation Cess was introduced by the Central Government to compensate for this revenue loss. While originally scheduled to end on 30th June 2022, the GST cess has been extended until 32st March 2026. This article discusses the GST Cess rate, cess applicability, how to calculate cess, and more in detail.
Rationale for the GST Compensation Cess
The meaning of GST cess becomes easier to grasp once you understand the rationale for this levy. GST is a consumption-based tax, where the revenue obtained goes to the state where consumption of the good/service has taken place. In short, the consumption state gets the tax revenue. With the introduction of GST, some manufacturing and net exporter states like Karnataka, Gujarat, and Maharashtra faced revenue loss due to the consumption-based nature of GST. The Indian Government introduced this cess to offer compensation to states. According to the provisions of the GST (Compensation to States) Act of 2017, this cess was to remain applicable on GST for a duration of 5 years from the date of GST implementation. However, in 2022, the GST Council decided to extend the cess until March 2026 to make up for the revenue loss of states during the Covid years.
Who is Required to Collect GST Compensation Cess?
The GST (Compensation to States) Act of 2017 outlines the applicability of the GST cess. Accordingly, all taxable persons under the GST regime – except taxpayers registered under the GST composition scheme – are liable to collect and remit this cess. GST compensation cess is applicable on the supply of goods and services notified by the Indian Government. This notified list currently includes goods like tobacco, aerated water, and motor cars. Additionally, the GST compensation cess is applicable on both the intrastate and interstate supply of goods and services. It is important to note that no compensation cess on GST is applicable on goods exported by an exporter. If cess is paid on exports, the exporter will be eligible for a refund of the input tax credit on the same.
GST Compensation Cess Rates of Goods
As mentioned earlier, GST cess is applicable on certain goods and services as notified in the GST (Compensation to States) Act of 2017. The GST cess rates applicable currently are represented in the table below:
| Notified Goods | GST Compensation Cess Rate Applicable |
| GST Cess on Pan Masala and Related Products | |
| Pan masala | 0.32R per unit |
| Pan masala containing tobacco | 0.61R per unit |
| All other goods containing ‘Gutka’ except pan masala with brand name | 0.43R per unit |
| All other goods containing ‘Gutka’ except pan masala without brand name | 0.43R per unit |
| Snuff and preparations containing snuff | 0.36R per unit |
| GST Cess on Aerated and/or Sweetened Beverages | |
| Aerated water | 12% |
| Lemonade | 12% |
| Others | 12% |
| Caffeinated beverages | 12% |
| GST Cess on Tobacco and Tobacco Products | |
| Unmanufactured tobacco (with lime tube) bearing a brand name | 0.36R per unit |
| Unmanufactured tobacco (without lime tube) bearing a brand name | 0.36R per unit |
| Branded tobacco refuse | 0.32R per unit |
| Tobacco essence and extract carrying a brand name | 0.36R per unit |
| Tobacco essence and extract without a brand name | 0.36R per unit |
| Jarda scented tobacco | 0.56R per unit |
| Filter khaini | 0.56R per unit |
| Pan masala containing tobacco | 0.61R per unit |
| Branded hookah/godaku tobacco | 0.36R per unit |
| Tobacco used for smoking hookah/chilam (not bearing a brand name) | 0.12R per unit |
| Other smoking tobacco with brand name | 0.28R per unit |
| Other smoking tobacco without brand name | 0.08R per unit |
| Homogenised/reconstituted tobacco with brand name | 0.36R per unit |
| Chewing tobacco without lime tube | 0.56R per unit |
| Chewing tobacco with lime tube | 0.56R per unit |
| Other preparations containing tobacco | 0.36R per unit |
| GST Cess on Cigarettes and Cigarette Products | |
| Non-filter cigarettes of up to 65mm | 5% + 2076/thousand |
| Non-filter cigarettes of 65mm-75mm | 5% + 3668/thousand |
| Filter cigarettes of up to 65mm | 5% + 2076/thousand |
| Filter cigarettes of 65mm to 70mm | 5% + 2474/thousand |
| Filter cigarettes of 70mm to 75mm | 5% + 3668/thousand |
| Cigarettes of tobacco substitutes | Rs. 4006/thousand |
| Cigarillos | 21%/Rs. 4,170/thousand (whichever is higher) |
| Cigarillos of tobacco substitutes | 12,5%/Rs. 4006/thousand (whichever is higher) |
| Smoking mixtures for pipes | 290% |
| Cheroots and Cigars | 21% or Rs. 4,170/thousand (whichever is higher) |
| GST Compensation Cess on Coal | |
| Coal, ovoid, and other similar solid fuel manufactured from coal | Rs. 400 per tonne |
| GST Compensation Cess Rate on Cars and Motor Vehicles | |
| Motor vehicles for the transport of up to 13 people including the driver | 15% |
| Motorcycles with engine capacities of over 350cc | 3% |
| Petrol, LPG, CNG vehicles of less than 1200cc (length less than 4000 mm) | 1% |
| Diesel vehicles of engine capacity of less than 1500cc (length less than 4000 mm) | 3% |
| Motor vehicles, three-wheelers, and vehicles with an engine capacity of less than 1500cc (length less than 4000 mm) | 15% |
| Motor vehicles with engine capacity of up to 1500cc | 17% |
| SUVs and utility vehicles with an engine capacity of more than 1500cc | 22% |
| Aircraft including helicopters for personal use | 3% |
| Yacht and other vessels for pleasure or sports | 3% |
Process to Calculate GST Compensation Cess
The taxable value of the supply is used to compute the GST Compensation Cess as per the GST cess rates applicable on the good. If there is GST cess applicable on goods imported to the country, this cess has to be collected along with the IGST and customs duty. For instance, let’s assume that the value of goods imported is Rs. 1,000, the GST rate is 18%, and customs duty is 10%. Then, the value for IGST levy would be equal to Rs. 1,100 (value plus customs). In this case, 18% GST would be applied on this amount. If the goods attract GST cess, then it would also be levied on Rs. 1,100.
Procedure of GST Compensation Cess Distribution Among States
The GST Compensation Cess collected is distributed among states to compensate for revenue loss during the implementation of the GST regime. The Central Government will calculate the GST cess for distribution to each state in the following way:
- Compute Base Revenue: The Centre will compute the tax revenue of the state in question for the fiscal year 2016-17.
- Calculate Projected Revenue: Next, the Centre will calculate projected revenue of the state for each financial year assuming a growth rate of 14% for 5 years. Computing projected revenue is essential as it helps the Centre understand how much revenue the state would have accumulated if GST was not introduced.
- Pay Compensation: The GST Compensation Cess will be distributed as per this projected revenue calculation.
Input Tax Credit and GST Compensation Cess
Under the GST system, tax is levied on every stage of the supply chain. But this system also allows businesses to claim Input Tax Credit (ITC) for the GST paid on their input purchases. However, the utilisation of ITC on GST Compensation Cess is limited. To elaborate, a business can use the ITC claimed on GST cess to solely off-set the Compensation Cess liability on the business’s very own output. In other words, the ITC cannot be used to reduce any other GST liabilities.
Conclusion
In a nutshell, GST Compensation Cess is a special cess created to compensate tax revenue loss of states due to the implementation of the consumption-based GST regime. This cess is levied on certain notified goods and services at prescribed rates which are amended by the government from time to time. Therefore, understanding what is GST Compensation Cess and the applicable rates is essential for businesses dealing with goods/services that attract this levy.
