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All about GST Compensation Cess

Updated on :  

08 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. 

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

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:

GoodsGST Compensation Cess
Cut tobacco20%
Unmanufactured tobacco (with lime tube) – featuring a brand name65%
Unmanufactured tobacco (without lime tube) – with a brand name71%
Branded tobacco refuse61%
Tobacco   extracts   and   essence   bearing   a   brand name 72%
Tobacco  extracts and essence  not  bearing a brand name 65%
Filter khaini160%
Jarda scented tobacco 160%
Cheroots and Cigar21% or 4170 per thousand, whichever higher
Cigarillos21% or Rs. 4170 per thousand, whichever is higher
Cigarettes containing tobacco excluding filter cigarettes, of length not more than 65mm5% + 2076 per thousand
Cigarettes containing tobacco apart from filter cigarettes, of length more than 65mm and up to 75mm5% + 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 millimetres5% + Rs.3668 per
thousand
Cigarettes of tobacco substitutesRs.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’ tobacco72%
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 tobacco72%
Pan masala (gutkha) containing tobacco204%
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 snuff72%
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%
Lemonade12%
Others12%
Motorcycles of engine capacity exceeding 350 cc 3%
Aircrafts (including helicopters, etc.) for personal use3%
Yacht and other vessels for pleasure or sports 3%
Motor vehicles for the transport of not more than 13 persons, including the driver15%
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 propulsion15%
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 cc17%
Motor vehicles of engine capacity exceeding 1500 cc other than motor vehicles specified against entry at S. No 52B20%
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 yearxxx
(-)Actual Revenue earned by the statexxx
=Compensation payable to the statexxx

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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