All about GST Compensation Cess

Monisha Chaudhary

30 Mar, 2024

With the implementation of the Goods and Services Tax (GST), a game-changing legislation aimed at simplifying India’s intricate tax system, the world of taxes suffered a dramatic change. At times overlooked, but the GST Compensation Cess is an essential element of this fiscal reform. Understanding the nuances of the GST Compensation Cess is crucial as businesses adjust to the new tax environment and consumers feel its consequences.

What is a Cess?

Cess refers to a particular kind of tax or levy collected by the government for certain reasons, sometimes set aside for particular initiatives or industries. Contrary to traditional taxes, which go towards the total revenue, cess collections are used to fund defined goals like infrastructure improvement, social welfare programmes, or solving certain economic problems. The rationale for introducing a cess is its ability to produce money that is only set aside for important initiatives or projects that require specific financial assistance. A cess is an additional charge on taxes levied by the central or state governments for certain purposes.

What is GST Compensation Cess?

The term “GST Compensation Cess,” also known as “Goods and Services Tax Compensation Cess,” is a separate tax levied on a select number of products and services to make up for revenue losses suffered by states as a result of the Goods and Services Tax (GST) system. In order to prevent states from experiencing major revenue deficits during the switch to the GST system, it is a type of fiscal instrument. The main goal of the GST Compensation Cess is to remedy any possible revenue imbalances that can occur after the implementation of a new tax structure like the GST.

There is a chance that certain states may see a decrease in revenue collections if they give up their own taxing authority in favour of a unified GST system¹, especially in the early stages of GST implementation. The GST Compensation Cess idea was designed to address this possible imbalance and ensure that states do not suffer financially. The money raised through this cess is used to make up for any revenue shortfalls that states may have as a result of switching from their current tax systems to the GST system.

Advantages of Compensation Cess

• One of the main advantages of the GST compensation cess is that it stabilises state revenues.
• States in a diversified country like India have different levels of fiscal capacity. The disparities in the ability of states to generate income are addressed by the GST Compensation Cess.
• While states and the central government work together to implement GST, the establishment of the GST Compensation Cess guarantees that governments still have some financial independence.
• The GST Compensation Cess encourages uniformity in state policy. States must follow specific rules and changes in order to be compensated, which encourages them to adopt consistent tax laws and administrative procedures.
• States are able to invest in necessary infrastructure projects and public services due to the increased cash stream from the GST Compensation Cess.
• Due to the maintenance of price stability, the GST Compensation Cess indirectly helps consumers. The method aids in preventing states from increasing taxes on products and services in order to make up for revenue deficits, which serves to reduce inflationary pressures and provide affordable access to basic necessities.

Goods Covered Under Compensation Cess

1. Aerated water – 12%
2. Pan masala – 60%
3. Motor Vehicle:
4. Motor vehicles or cars that are used for transportation of people (excluding a vehicle which can transport more than ten people) – 15%
5. Motor vehicles with engine sizes more than 1500cc – 22%
6. Motor vehicles with an engine size not more than 1500cc – 17%
7. Diesel Motor vehicles with engine size not more than 1500cc and length which does not exceed 4000mm – 3%
8. LPG and CNG vehicles – 1%
9. Coal – 400 per tonne
10. Ovoids – 400 per tonne
11. Briquettes – 400 per tonne
12. Solid fuels are the same as coal ovoids and briquettes manufactured from coal – 400 per tonne.
13. All goods not having a brand name, excluding pan masala and including (tobacco) gutka – 89%
14. All goods having brand names or styles, excluding pan masala and including (tobacco) gutka – 96%
15. Pan masala with tobacco – 204%
16. Hookah with brands – 72%
17. Branded tobacco refuse – 61%
18. Cigarillos – 4170/per thousand or 21%, whichever is higher
19. Cigarettes with tobacco (not more than 65mm ) – 2076/per thousand plus 5%
20. Cigarettes with tobacco ( more than 65mm but less than 75mm) – 3668/per thousand plus 5%
21. Cigars and cheroots – 4170/per thousand or 21 %
22. Unprocessed tobacco with a brand name and without a lime tube – 71%
23. Unprocessed tobacco with a brand name highlighted and a lime tube – 65%
24. Chewing tobacco – without a lime tube – 160%, with lime tube – 142%

Collection of GST Compensation Cess

Except for exporters and those covered by the composition structure, every individual or entity engaged in the provision of a particular good or service shall be liable for collecting a compensation cess. This obligation includes payment of compensatory cess for specific imported items from outside. The exporter has the ability to request a refund for a similar amount if compensating cess is paid on exported products.

How to Calculate GST Compensation Cess

How to Determine GST Compensation Cess is calculated using a simple formula. With the use of this system, the state would be able to cover any possible income shortfalls brought on by the adoption of the GST.

• Determine the Base Year Revenue: the average of the total amount of revenue that a state earned from taxes on goods and services during the fiscal year before the introduction of the GST (also known as the base year).
• Calculate the Projected Growth Rate: Calculate the Projected Growth Rate by projecting the state’s revenue growth over the next five years from the base year.
• Calculate Compensation: Calculate the discrepancy between the predicted revenue and the base year revenue to meet the cess requirement. The required compensation is represented by this discrepancy.

Conclusion

In conclusion, the complex structure of the GST Compensation Cess is crucial for stabilizing state revenue and preserving the precarious equilibrium between the federal government and the states under the GST regime. It is clear from a detailed analysis of this mechanism’s development, collection method, and effects on companies and consumers that it is an essential instrument for managing revenue deficits and preserving the fiscal independence of governments. It is our common obligation to design and improve mechanisms like the Compensation Cess as the GST environment continues to change. Implementation of GST Compensation Cess is a tax that is levied in addition to the ordinary GST on certain items, particularly luxury items and those with detrimental societal effects. All taxpayers are subject to this extra fee, with the exception of those involved in exporting the specified items or those who have opted to take part in the GST composition programme. We can utilize the full potential of this instrument to establish a more robust and fair GST system for the benefit of the country’s economy and its residents by promoting transparency, accountability, and informed decision-making.

Frequently Asked Questions

1. https://www.gst.gov.in/