GST Compensation Cess may see a Downfall of Rs. 63000 Crore – Read full Story

Monisha Chaudhary

10 Jul, 2023

The purpose of the GST regime is to benefit both the buyer and the seller and make compliance easier for businesses. However, the implementation of GST created a skirmish in India. Individual states are likely to lose money because of the way the law is structured. The finance ministry of India^[1] dragged their feet in the matter and created the compensation cess so that states will remain in the state of floating as the country adjusts to GST.

Understanding Compensation Cess

The purpose of introducing compensation cess is to protect the states from the loss caused due to implementation of GST. Compensation cess is imposed on a certain type of goods and businesses must pay it in addition to GST. This is levied on inter-state sales, intra-state sales, and imports. The export department is exempted from this cess. The purpose of this cess is to make sure that states have enough money to operate.

Compensation Cess and the List of Items It Covers

The government of India has provided the list of items on which compensation cess is levied. These include:

• Pan Masala
• Tobacco, tobacco products, and tobacco substitute
• Aerated water
• Motor cars
• Coal and solid fuels that are made from coal
• Motor vehicles designed to transport 10 or more people

Different compensation cess rate is applicable to various products and the cess is calculated based on the value of the product without GST. 

For example, on coal, the cess is imposed at Rs. 400 per ton. That means if you sell 4 tonnes of coal that have a value of Rs. 10, 000, the cess you will have to pay is Rs. 1600. At a rate of 5%, GST applicable to the shipment is Rs. 500. Your total tax liability for the coal will become Rs. 2100.  

The maximum cess rates that can be charged are:

• Motor cars: 15% of the value
• Pan masala: 60% of the value
• Aerated waters: 12% of the value
• A motor vehicle designed to transport 13 or more people: 15% of the value

Compensation Cess for the Current Financial Year

The government of India is seeing a shortfall of Rs. 63,200 crore in GST compensation cess for the current fiscal year as there is a dip in the revenue collection. The augmentation panel for the GST Council’s revenue has provided the calculation. As per the prediction by the panel the shortage limit can exceed Rs. 2 trillion within 2012-22.

The GST council has made a presentation, and according to it, the compensation requirement for states is expected to be around Rs 1.6 lakh crore for the continuous fiscal, at a growth rate of 5%. But, collections of compensation cess are expected to be around Rs 96,800 crore, causing a significant shortfall.

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The available collections have more than doubled over the previous fiscal from Rs 69,275 crore –while the existing collections have remained flat affecting the growth of the economy.

Compensation cess collection in the final year 2018-2019 is Rs 95,081 crore, slightly lower than Rs 96,800 crore that is expected in this fiscal ending March 2020. 

The center had already launched the compensation of amount Rs 35,298 crore to states for the month of August and September just two days before the GST council meeting which was held on 18 December.

Also, Read: What is Cess on GST? – Applicability and Rates