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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.
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.
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|
|Unmanufactured tobacco (with lime tube) – featuring a brand name||65%|
|Unmanufactured tobacco (without lime tube) – with a brand name||71%|
|Branded tobacco refuse||61%|
|Tobacco extracts and essence bearing a brand name||72%|
|Tobacco extracts and essence not bearing a brand name||65%|
|Jarda scented tobacco||160%|
|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|
|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|
|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|
|Cigarettes of tobacco substitutes||Rs.4006 per thousand|
|Cigarillos of tobacco substitutes||12.5% or Rs. 4,006 per thousand whichever is|
|Smoking mixtures for pipes and cigarettes||290%|
|Branded ‘hookah’ or ‘gudaku’ tobacco||72%|
|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 tobacco||72%|
|Pan masala (gutkha) containing tobacco||204%|
|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%|
|Preparations containing snuff||72%|
|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|
|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%|
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.
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.
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.
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: