The Goods and Services Tax (GST) was introduced on 1 July 2017 and has replaced the old indirect taxation regime. One significant provision that was introduced through the GST Act was the Compensation Cess. This was mainly brought upon to compensate the States (that mostly carried out production of goods) for the loss of revenue arising after the implementation of GST. In this article, we shall discuss the following: –
GST is charged at the time of supply and is linked to the destination of its consumption. E.g., Suppose a product is manufactured in Karnataka and consumed in Kerala. In that case, the GST is collected at the consumption stage, i.e., Kerala (IGST is collected). That means the revenue generated through the GST collected gets credited to the State only where the consumption takes place, i.e., Kerala. Due to this procedure, major manufacturing States faced revenue loss. Hence, GST Compensation Cess was introduced to compensate for the possible revenue losses faced by these manufacturing States.
The Compensation Cess was brought into force on 1 July 2017 and was prescribed for five years, i.e., up to 1 July 2022. However, as per the 42nd Goods and Services Tax Council Meeting, it has been decided to extend the levy of the cess beyond 2022 (the period is yet to be decided).
Some of the features of the Compensation Cess are: –
- It will be collected on selected goods and
- It will not be payable by exporters.
- It will not be payable by those people who have opted for a composition levy.
- Exporters are eligible for a refund of compensation cess paid, if any, on the goods exported by them.
Certain notified goods attract GST Compensation Cess as per the Goods and Services Tax (Compensation to States) Act, 2017.
|Sl. No.||Description||GST Compensation Cess Rate|
|2.||Aerated Waters, Lemonade, and others||12%|
|3.||Branded Unmanufactured Tobacco (without lime tube)||71%|
|4.||Branded Unmanufactured Tobacco (with lime tube)||65%|
|5.||Branded Tobacco refuse||61%|
|6.||Cigar and cheroots||21% or INR 4,170 per thousand, whichever is higher|
|7.||Cigarillos||21% or INR 4,170 per thousand, whichever is higher|
|8.||Cigarettes containing tobacco other than filter cigarettes, of length, not exceeding 65 mm||5% + INR 2,076 per thousand|
|9.||Cigarettes containing tobacco other than filter cigarettes, of length exceeding 65 mm but not exceeding 75 mm||5% + INR 3,668 per thousand|
|10.||Filter cigarettes of length (including the length of the filter- the length of the filter being 11 millimetres or its actual length, whichever is more) not exceeding 65 mm||5% + INR 2,076 per thousand|
|11.||Filter cigarettes of length (including the length of the filter- the length of the filter being 11 millimetres or its actual length, whichever is more) exceeding 65 mm but not exceeding 70 millimetres||5% + INR 2,747 per thousand|
|12.||Filter cigarettes of length (including the length of the filter- the length of the filter being 11 millimetres or its actual length, whichever is more) exceeding 70 mm but not exceeding 75 millimetres||5% + INR 3,668 per thousand|
|13.||Other cigarettes containing tobacco||36% + INR 4,170 per thousand|
|14.||Cigarettes of tobacco substitutes||INR 4,006 per thousand|
|15.||Cigarillos of tobacco substitutes and others||12.5% or INR 4,006 per thousand, whichever is higher|
|16.||Branded hookah or gudaku tobacco, branded homogenised or reconstituted tobacco, preparations containing chewing tobacco, snuff, preparations containing snuff, branded tobacco extracts and essence||72%|
|17.||Unbranded hookah or chilam or gudaku tobacco||17%|
|18.||Other unbranded water pipe smoking tobacco and other unbranded smoking tobacco||11%|
|19.||Mixtures used for smoking with pipes and cigarettes||290%|
|20.||Other branded smoking tobacco||49%|
|21.||Branded Reconstituted or Homogenised tobacco, preparations with chewing tobacco, snuff and its preparations, branded tobacco extracts and essence||72%|
|22.||Chewing tobacco without lime tube, filter khaini, Jarda scented tobacco||160%|
|23.||Chewing tobacco with lime tube||142%|
|24.||Unbranded tobacco extracts and essence||65%|
|27.||Branded goods containing pan masala tobacco||96%|
|28.||Unbranded goods containing pan masala tobacco||89%|
|29.||Coal; briquettes, ovoids and similar solid fuels manufactured from coal, Lignite, whether or not agglomerated, excluding jet,
Peat (including peat litter), whether or not agglomerated
|INR 400 per tonne|
|30.||Vehicles for transport of thirteen or more people, including the driver||15%|
|31.||LPG and CNG motor vehicles with a capacity above 1200cc and a length greater than 4,000mm||1%|
|32.||Motor vehicle with diesel engine with a capacity above 1500cc and a length greater than 4,000mm
Motorcycle with an engine with a capacity below 350CC
Aircraft for personal use (helicopters, aeroplanes, etc.)
Yachts and similar vessels for sports or pleasure
|33.||Motor vehicle with engine capacity less than 1500CC||17%|
|34.||SUV with engine capacity above 1500CC. SUVs are motor vehicle with length above 4,000mm and having ground clearance of 170mm and above||22%|
|35.||Motor vehicle with engine capacity above 1500CC other than SUV||20%|
|36.||Beverages with Caffeine||12%|
Input tax credit is available on compensation cess. However, it can be used only against supply where compensation cess is payable. Hence, the Input Tax Credit of this cess shall be availed only to pay compensation cess and not any other taxes like CGST, SGST or IGST.
As per Section 15(2)(a) of the CGST Act, 2017, the value of supply excludes all taxes, cesses, duties, fees and charges under any law in force noted within the CGST Act, 2017, the SGST Act, 2017, the Union Territory GST Act, 2017 and the GST (Compensation to States) Act, 2017. Hence compensation cess is not included in the valuation of supply for computing GST. For Eg., if the value of a product is INR 200 and compensation cess applicable is 12%, and IGST is 18%, then the Compensation Cess is INR 24 (200*12%), and IGST will be INR 36 (200*18%).
The Compensation to State Governments is computed by using the following formula:
Projected revenue for a particular financial year – Actual revenue earned by the State = Compensation payable to the State.
Projected revenue for a particular financial year is calculated as follows:
Base revenue [Tax revenue of the State for FY 2016-17] * Projected Growth Rate [Assumed at 14% as per Section 3 of the GST (Compensation to States) Act, 2017].