All about GST Compensation Cess

By Annapoorna

Updated on: Sep 5th, 2024

3 min read

GST Compensation Cess is levied by the Goods and Services Tax (Compensation to States) Act 2017. The object of levying this cess is to compensate the states for the loss of revenue arising due to the implementation of GST on 1st July 2017 for a period of five years or such period as recommended by the GST Council. The Council can propose complete discontinuation or consider integrating with the highest GST tax bracket of 28% in the upcoming 54th GST Council meeting.

GST, being a consumption-based tax, would result in loss of revenue for manufacturing-heavy states.

Latest updates

28th February 2023
The base for computation of compensation cess on various products of pan masala has been now shifted from Advalorem to retail price. Accordingly, the cess rates are revised as mentioned in the below table. Also, refer the notification for more details.

49th GST Council meeting
In the 49th GST Council meeting, it was decided by the Council that all GST compensation dues that were pending for June 2022 (when the compensation cess regime ended) amounting to Rs.16,982 crore would be cleared immediately. The same would be funded through the Central Government's resources and recouped from future compensation cess collections. A further Rs.16,524 crore would also be released to the states as and when the AG's certificate is released.

Who is required to collect GST compensation cess?

All taxpayers who are engaged in the supply of selected goods or services other than exporters and composition taxpayers will collect compensation cess. This will also include compensation cess chargeable on certain goods imported to India. In case compensation cess is paid on exports, the exporter can claim refund of the same.

What goods are covered under compensation cess?

The various goods and their respective cess rates are prescribed under the GST (compensation to states) Act, 2017 amended from time-to-time, and are listed 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 uni
Tobacco extracts and essence bearing a brand name	0.36R per unit
Tobacco extracts 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 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 per thousand
Cigarettes of tobacco substitutes	Rs.4006 per thousand
Cigarillos of tobacco substitutes	12.5% or Rs. 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 uni
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	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 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%

How to utilise Input Tax Credit (ITC) of compensation cess?

The input tax credit of the compensation cess can only be used to set off the liability of compensation cess arising due to outward supply.

How to calculate compensation cess?

Compensation cess is levied over and above the amount of GST charged in relation to a particular supply. The calculation is similar to that of GST – the prescribed rate is applied to the transaction value given under section 15 of the CGST Act 2017 to arrive at the cess liability.

How will the compensation cess be distributed to the states?

The amount of compensation to be distributed to each state is calculated as follows:

Step 1: Base revenue = Tax revenue of the state in FY 2016-17.

Step 2: Assume growth rate as 14% and calculate projected revenue for each financial year.

The implication of projected revenue is that this would be the revenue that a state could have earned if GST were not implemented. This calculation is done for a period of five years since compensation cess is intended to be in effect for the transition period of five years.

Step 3: Calculate the Compensation payable for each FY as follows

	Projected Revenue for that particular financial year	xxx
(-)	Actual Revenue earned by the state	xxx
=	Compensation payable to the state	xxx

Such a provisional calculation is done and the amount is paid every two months to the states. Surplus, if any, in the compensation fund at the end of the transition period would be distributed between the Centre and the states using an appropriate formula.

Ways to acquire funds for distributing compensation cess

At present, the compensation payment for the last quarter of FY 2019-20 aisin arrears with an increasing deficit in the compensation fund due to the economic slowdown resulting from the pandemic situation worldwide. The Centre has the following options available with it to fill this deficit:

Revision of the compensation cess formula
Increase in the rate of the composition cess/prescribing more commodities to be leviable under the compensation cess
Borrow funds from the market

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About the Author

Annapoorna

Assistant Manager - Content

I preach the words, “Learning never exhausts the mind.” An aspiring CA and a passionate content writer having 4+ years of hands-on experience in deciphering jargon in Indian GST, Income Tax, off late also into the much larger Indian finance ecosystem, I love curating content in various forms to the interest of tax professionals, and enterprises, both big and small. While not writing, you can catch me singing Shāstriya Sangeetha and tuning my violin ;). Read more

Quick Summary

GST Compensation Cess levied via Goods and Services Tax (Compensation to States) Act 2017; covers compensation structure, recent updates, and distribution methods to states. Applies to specific goods/services holders except exporters and composition taxpayers. Input Tax Credit usage, calculation, and fund acquisition methods explained. Collection covers various products; revision details and questions: