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GST

Compensation Cess in GST – Features, Applicability, CESS Rate, Calculation

GST Compensation Cess is imposed on specific goods to compensate states for revenue losses due to the GST transition. Understanding its purpose and implications is crucial for businesses dealing with these goods.

The GST Compensation CESS was extended until March 31, 2026, by the central government on December 28, 2022. This CESS is imposed on certain goods and services to compensate states for the loss of revenue arising from the implementation of the Goods and Services Tax (GST). The CESS was originally scheduled to end on June 30, 2022, but it was extended for an additional three years to help states repay the borrowings they had taken to compensate for the revenue loss.

Who is Required to Collect GST Compensation Cess?

All registered taxpayers who supply goods or services covered under the GST Compensation CESS are required to collect and pay the CESS. This includes both domestic and imported goods. Exporters and those who have opted for the composition scheme are not required to collect the CESS.

Important Features of Compensation CESS

  • The CESS is levied in addition to the applicable GST rate.
  • The CESS is collected on the value of the goods or services, before applying the GST rate.
  • The CESS is payable on both intra-state and inter-state supplies.
  • The CESS is not payable on exports or supplies made by unregistered taxpayers.

GST CESS Applicability

The GST Compensation CESS is applicable on a limited number of goods and services. These goods and services are typically considered to be “sin goods” or “luxury goods.” The following is a list of goods and services that are covered under the CESS:

  • Motor vehicles
  • Tobacco products
  • Pan masala
  • Aerated beverages
  • Coal
  • Lignite
  • Gold
  • Silver
  • Petroleum products

What Goods Are Covered Under Compensation Cess? – GST Cess Rate

The GST Compensation CESS rate varies depending on the goods or services. The following table shows the current CESS rates for some of the most common goods and services:

Goods or Services CESS Rate
Motor vehicles 25%
Tobacco products 200%
Pan masala 210%
Aerated beverages 20%
Coal Rs. 400 per tonne
Lignite Rs. 200 per tonne
Gold 3%
Silver 6%
Petroleum products 11%

How to Utilise Input Tax Credit (ITC) of Compensation Cess?

The Input Tax Credit (ITC) of compensation CESS can only be used to pay compensation CESS and not other taxes such as CGST, SGST, UTGST, or IGST. The ITC of compensation CESS can be carried forward to the next financial year.

  • The GST Compensation CESS is a temporary levy and is scheduled to end on March 31, 2026.
  • The CESS is collected by the Central Government and then distributed to the states.
  • The CESS is an important source of revenue for states and helps them to bridge the gap between their actual revenue and the guaranteed revenue under the GST regime.

For more information on GST Compensation CESS, please visit the website of the Central Board of Indirect Taxes and Customs (CBIC).

Step By Step Calculation of the Compensation Cess Amount

The GST registration Compensation Cess is calculated on the value of the goods or services before applying the GST rate. The following is a step-by-step guide on how to calculate the compensation cess amount:

  1. Identify the goods or services: Determine whether the goods or services you are supplying are covered under the GST Compensation Cess. You can refer to the list of goods and services covered under the cess provided above.
  2. Determine the applicable cess rate: Once you have identified the goods or services, determine the applicable cess rate. The cess rate varies depending on the goods or services. You can refer to the table provided above for the cess rates of some of the most common goods and services.
  3. Calculate the cess amount: Multiply the value of the goods or services by the applicable cess rate to calculate the cess amount.

For example, if you are supplying a car that costs Rs. 10,00,000, the applicable cess rate is 25%. The cess amount would be calculated as follows:

Cess amount = Rs. 10,00,000 * 25/100 = Rs. 2,50,000

Compensation Cess in Case of Import/export

The GST Compensation Cess is also applicable to imported goods. The cess is levied on the value of the goods before applying the customs duty. The cess rate is the same as the rate applicable to domestic goods.

Exporters are not required to pay the GST Compensation Cess.

How Will the Compensation Cess Be Distributed to the States?

The GST Compensation Cess is collected by the Central Government and then distributed to the states. The cess is distributed based on a formula that takes into account the revenue loss of each state due to the implementation of GST.

Ways to Acquire Funds for Distributing Compensation Cess

The Central Government has two main ways to acquire funds for distributing compensation cess:

  • Borrowing from the market: The Central Government can borrow funds from the market to finance the distribution of compensation cess to states.
  • Surplus from the GST Compensation Fund: The GST Compensation Fund is a non-lapsable fund that is used to collect and distribute the compensation cess. If there is a surplus in the fund, the surplus can be used to finance the distribution of compensation cess to states.

Can You Avail of Input Credit on Cess Paid on the Inward Supply of These Goods?

Yes, you can avail of the Input Tax Credit (ITC) on the compensation cess paid on the inward supply of goods covered under the cess. The ITC of compensation cess can only be used to pay compensation cess and not other taxes such as CGST, SGST, UTGST, or IGST. The ITC of compensation cess can be carried forward to the next financial year.

GST Compensation Cess FAQs

What is GST Compensation Cess?

GST Compensation Cess is an additional tax levied on certain goods and services to compensate states for the revenue loss they incurred due to the implementation of the Goods and Services Tax (GST).

Why was GST Compensation Cess introduced?

GST Compensation Cess was introduced to ensure that states did not suffer any financial losses due to the transition from the old tax regime to the new GST regime.

What types of goods and services are subject to GST Compensation Cess?

GST Compensation Cess is applicable to a specific list of goods and services, primarily considered luxury or sin goods. These include motor vehicles, tobacco products, pan masala, aerated beverages, coal, lignite, gold, silver, and petroleum products.

How is GST Compensation Cess calculated?

GST Compensation Cess is calculated as a percentage of the value of the goods or services before applying the GST rate. The cess rates vary depending on the goods or services. For instance, motor vehicles have a cess rate of 25%, while tobacco products have a cess rate of 200%.

Who collects GST Compensation Cess, and where does it go?

GST Compensation Cess is collected by registered taxpayers who supply goods or services covered under the cess. The collected cess is then transferred to the Central Government, which distributes it to the states based on a formula that considers each state's revenue loss due to GST implementation.

Is GST Compensation Cess applicable on all goods and services under GST?

No, GST Compensation Cess is only applicable to a specific list of goods and services, as mentioned earlier. Most goods and services under GST are not subject to this additional tax.

Are there any exemptions or concessions for GST Compensation Cess?

No, there are no general exemptions or concessions for GST Compensation Cess. The cess is levied uniformly on all goods and services covered under the cess, regardless of the taxpayer's profile or location.

How often are the rates for GST Compensation Cess revised?

The rates for GST Compensation Cess are reviewed periodically and can be revised based on the recommendations of the GST Council. The last revision was in December 2022, extending the cess until March 31, 2026.

Can businesses claim Input Tax Credit (ITC) on GST Compensation Cess paid?

Yes, businesses can claim Input Tax Credit (ITC) on the GST Compensation Cess paid on the inward supply of goods covered under the cess. The ITC of compensation cess can only be used to offset compensation cess liability and not other taxes like CGST, SGST, UTGST, or IGST.

Is GST Compensation Cess applicable in all states of India?

Yes, GST Compensation Cess is applicable uniformly across all states and union territories of India.

Who are GST compensation cess applicable?

GST compensation cess is applicable to all registered taxpayers who supply goods or services covered under the cess. This includes both domestic and imported goods. Exporters and those who have opted for the composition scheme are not required to collect the cess.


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