GST Compensation Cess

Sakshi Jain, CA LLB at April 01, 2024

GST Compensation Cess Information

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: -

What Is Compensation Cess In GST?

Goods On Which GST Compensation Cess Is Applicable

Is Input Tax Credit Available On Compensation Cess?

Is Compensation Cess Considered While Calculating Value Of Supply?

How Will The Central Government Compensate The State Governments?

What is Compensation Cess in GST?

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.

Goods on Which GST Compensation Cess is Applicable

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
1.	Pan-Masala	60%
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%
25.	Cut Tobacco	20%
26.	Gutkha	204%
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	3%
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%

Is Input Tax Credit Available on Compensation Cess?

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.

Compensation Cess Considered While Calculating Value of Supply?

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%).

How Will the Central Government Compensate the State Governments?

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].

About the Author

Sakshi Jain, CA LLB

Content Manager

I am a content and marketing manager at Masters India. I am also a tax and finance content writer. I also write academic books on accounts and tax. I have an experience of 7+ years in Income Tax Read more...

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