The GST Compensation Cess is a surcharge imposed on such notified products in addition to the GST. The GST Compensation Cess, also known as the GST Cess, was created to compensate states with a high manufacturing industry. Since GST is a consumption-based tax, several states saw a drop in revenue as a result of its introduction. As a result, manufacturing-oriented states saw a drop in revenue.
An extra tax known as the GST reimbursement cess is imposed to reimburse these states. It is levied on a list of notified products, and the proceeds are distributed among the states. From the date of GST implementation, a 5-year cess will be imposed.
Who is liable to collect GST Compensation Cess?
The GST compensation cess must be collected and remitted by all taxable persons selling the notified products. It is not applicable to GST compensation tax payers.
Which goods are notified for charging GST Compensation Cess?
The following goods have been notified so far:
- Pan Masala
- Tobacco and tobacco products
- Cigarettes
- Coal, briquettes and similar solid fuels manufactured from coal, lignite excluding jet and peat.
- Aerated waters
- Motor vehicles
What is the rate of GST compensation Cess applicable on these goods?
The GST compensation cess rates schedule for the notified goods are listed below:
| Goods | GST Compensation Cess |
| Pan masala | 60% |
| Unmanufactured tobacco (with lime tube) – featuring a brand name | 65% |
| Unmanufactured tobacco (without lime tube) – with a brand name | 71% |
| Branded tobacco refuse | 61% |
| Cheroots and Cigar | 21% or 4170 per thousand, whichever higher |
| Cigarillos | 21% or 4170 per thousand, whichever 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 |
| Branded ‘hookah’ or ‘gudaku’ tobacco | 72% |
| Chewing tobacco (without lime tube) | 160% |
| Chewing tobacco (with lime tube) | 142% |
| Pan masala (gutkha) containing tobacco | 204% |
| All goods, excluding pan masala containing tobacco ‘gutkha’, with the brand name | 96% |
| All goods, excluding pan masala containing tobacco ‘gutkha’, not bearing a brand name | 89% |
| 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 | 400 per tonne |
| Aerated waters | 12% |
| Motor cars and other motor vehicles (including station wagons and racing cars) principally designed for the transport of persons (excluding motor vehicles for the transport of 10 or more persons, including the driver) | 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 over 1500cc, popularly known as Sports Utility Vehicles (SUVs) including utility vehicles. | 22% |
Can avail Input Credit on Cess paid on inward supply of these goods?
GST compensation Cess paid on inward supplies is eligible for input credit. The credit for Cess charged, on the other hand, may only be used to fund the GST reimbursement Cess liability.
How is the GST compensation cess calculated?
The transaction value, or the price at which the products are delivered, is used to measure the Cess. The Cess should be added to the GST taxes, which are CGST + SGST for intrastate supplies and IGST for interstate supplies.
Ways to acquire funds for distributing compensation cess
Owing to the global economic downturn caused by the pandemic situation, the reimbursement payment for the last quarter of FY 2019-20 is currently in arrears, with a growing shortfall in the compensation fund. The Centre has the following options available with it to fill this deficit:
- Revision of the compensation cess formula
- Increase in the rate of the composition cess/prescribing more commodities to be leviable under the compensation cess
- Borrow funds from the market
CONCLUSION
The states have been experiencing revenue losses for some time, and it has worsened in recent months as a result of the COVID-19 lockout. The states addressed the issue of reimbursement cess not being released from the Centre to the States for a long time at the latest 41st GST council meeting, which was scheduled on August 27, 2020. In 2020-21, the shortfall is expected to be Rs 2.35 lakh crore. However, the central government claims that only Rs 97,000 crore of the Rs 2.35 lakh crore is due to the implementation of GST. The remaining deficit is due to Covid-19, which was not covered by the GST Constitutional Amendment. The finance ministry has now presented states with two options for resolving the compensation cess shortfall.