- What is GST Compensation Cess?
- Why is GST Compensation Cess levied?
- Who is liable to collect GST Cess?
- Which goods will attract GST Cess?
- What is the GST Cess Rate applicable on these goods?
- How to calculate GST Cess?
- Can input tax credit be availed on GST Cess paid on inward supplies?
The introduction of the Goods and Services Tax (GST) replaced many local taxes, including VAT and Octroi, that the states imposed. This affected a significant portion of many states’ income. Especially the states like Maharashtra that earned more from such taxes lost a lot of money from octroi. Since states couldn’t collect their own taxes as before, the central government promised to pay them for any losses for five years or any period as applicable by the GST Council. This condition for providing compensation led to the emergence of the GST Compensation CESS.
What is GST Compensation Cess?
GST Compensation Cess (often simply called "Compensation Cess") is a surcharge imposed under the Goods and Services Tax (Compensation to States) Act, 2017. It is collected in addition to the standard GST rates on a defined list of goods and services to bridge the revenue gap faced by states that lost tax income when GST became a consumption‑based tax.
The transition to GST allowed the consumer states to collect all the applicable taxes, while the manufacturing states suffered significant losses. For example, if a product is made in State A but sold and used in State B, the GST collected goes to State B, not State A. Since GST is applied based on where goods are consumed, and not where they are produced, manufacture-driven states, like Gujarat, Haryana, Karnataka, Maharashtra, and Tamil Nadu, began worrying about the loss of revenue under this system. GST compensation CESS came as a solution to this issue.
Why is the Cess Levied?
Under GST, tax revenue accrues to the state where the goods are consumed, not where they are produced. Manufacturing‑intensive states (e.g., Maharashtra, Gujarat, Tamil Nadu, Karnataka, Haryana) therefore experienced a shortfall in indirect tax collections. The Compensation Cess provides a dedicated fund to compensate these states for the projected shortfall of 14% annual growth in their tax revenues during the transition period.
Who Must Collect the Cess?
All taxable persons (except composition taxpayers) who supply any of the notified goods must collect the cess at the time of invoicing and remit it to the government. The cess is payable on the same invoice as GST but shown as a separate line item.
Why is GST Compensation Cess levied?
The GST Cess is levied to compensate states who may suffer any loss of revenue due to the implementation of GST, as per the provisions of the GST Compensation Cess Act. As GST is a consumption-based tax, the state in which consumption of goods or services happens will be eligible for the revenue on supplies. As a result, manufacturing states like Maharashtra, Tamil Nadu, Gujarat, Haryana and Karnataka are expected to face a decrease in revenue from indirect taxes.
In order to compensate these states for this loss of revenue, GST Cess will be levied on the supply of certain goods, which will be distributed to these states, to bridge any potential tax revenue gaps. The GST Cess will be levied for the first 5 years of the GST regime.
What Happens to the Cess Money?
- Used for a specific, pre-defined purpose
A cess is a type of tax collected for a particular objective—such as education, infrastructure, or health. Unlike general taxes, the government is expected to use cess funds only for the purpose it was introduced for (for example, the GST Compensation Cess is used to compensate states for revenue loss after GST implementation).
Fan-out queries answered: Where does cess money go? Is cess used for specific purposes? - Credited to dedicated funds (not always shared with states)
Cess collections are typically credited to special-purpose funds created by the central government. Unlike regular tax revenue, many cesses are not part of the divisible pool shared with states, which gives the central government more control over how the funds are allocated.
Fan-out queries answered: Is cess shared with states? How is cess different from tax? - May remain unutilized or carried forward
In practice, not all cess collected is immediately spent. Some funds can remain unutilized or be carried forward for future use, depending on project timelines, policy decisions, or administrative delays.
Fan-out queries answered: Is all cess money used? What happens to unused cess funds?
How does GST Compensation CESS work?
The central government, under the Compensation CESS, promised states that any shortfall below the projected 14% annual growth in state tax revenues would be covered for the first five years. Accordingly, the union government will pay the difference from the GST compensation fund. This amount cannot be used for any other purpose. If there is any money left unused in the fund at the end of the five-year transition period, it is divided equally between the central and state governments. The states’ shares are distributed based on how much revenue each state earned from their State GST or Union Territory GST in the final year of the transition period, ensuring a fair distribution of remaining funds.
This tax collection was initially introduced to be continued until 2022 but has been extended to March 31, 2026.
Which goods will attract GST Cess?
The GST compensation CESS is applicable for certain products, which include the following:
- Pan masala, tobacco, tobacco products, and tobacco substitutes
- Coal, briquettes, and solid fuel coming from coal, lignite (agglomerated or non-agglomerated)
- Aerated waters
- Motor vehicles, specifically the ones designed for the transport of people of less than 10, including the driver. Station wagons and racing cars are also included.
- Other additions as notified from time to time.
The CESS rate applicable for some products is listed below.
|
Sl. No. |
Chapter / Heading /Sub-heading / Tariff item |
Description of Goods |
CESS Applicable |
|
1 |
2106 90 20 |
Pan-masala |
0.32R per unit |
|
2 |
2202 10 10 |
Aerated waters |
12% |
|
3 |
2202 10 20 |
Lemonade |
12% |
|
4 |
2202 10 90 |
Others |
12% |
|
4A |
2202 99 90 |
Caffeinated beverages |
12% |
|
4B |
2202 |
Carbonated beverages of fruit drinks or carbonated beverages with fruit juice. |
12% |
|
5 |
2401 |
Unmanufactured tobacco (without lime tube) – bearing a brand name |
0.36R per unit |
|
6 |
2401 |
Unmanufactured tobacco (with lime tube) – bearing a brand name |
0.36R per unit |
|
7 |
2401 30 00 |
Tobacco refuse, bearing a brand name |
0.32R per unit |
|
8 |
2402 10 10 |
Cigar and cheroots |
21% or Rs. 4170 per thousand, whichever is higher |
|
9 |
2402 10 10 |
Cigarillos |
21% or Rs. 4170 per thousand, whichever is higher |
|
10 |
2402 20 10 |
Cigarettes containing tobacco other than filter cigarettes, of length not exceeding 65 millimetres |
5% + Rs.2076 per thousand |
|
11 |
2402 20 20 |
Cigarettes containing tobacco other than filter cigarettes, of length, exceeding 65 millimetres but not exceeding 75 millimetres |
5% + Rs.3668 per thousand |
|
12 |
2402 20 30 |
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 millimetres |
5% + Rs.2076 per thousand |
|
13 |
2402 20 40 |
Filter cigarettes of length (including the length of the filter, the length of filter being 11 millimetres or its actual length, whichever is more) exceeding 65 millimetres but not exceeding 70 millimetres |
5% + Rs.2747 per thousand |
|
14 |
2402 20 50 |
Filter cigarettes of length (including the length of the filter, the length of filter being 11 millimetres or its actual length, whichever is more) exceeding 70 millimetres but not exceeding 75 millimetres |
5% + Rs.3668 per thousand |
|
15 |
2402 20 90 |
Other cigarettes containing tobacco |
36% + Rs.4170 per thousand |
|
16 |
2402 90 10 |
Cigarettes of tobacco substitutes |
Rs.4006 per thousand |
|
17 |
2402 90 20 |
Cigarillos of tobacco substitutes |
12.5% or Rs. 4,006 per thousand whichever is higher |
|
18 |
2402 90 90 |
Other |
12.5% or Rs. 4,006 per thousand whichever is higher |
|
19 |
2403 11 10 |
'Hookah' or 'gudaku' tobacco bearing a brand name |
0.36R per unit |
|
20 |
2403 11 10 |
Tobacco used for smoking 'hookah' or 'chilam' commonly known as 'hookah' tobacco or 'gudaku' not bearing a brand name |
0.12R per unit |
|
21 |
2403 11 90 |
Other water pipe smoking tobacco not bearing a brand name. |
0.08R per unit |
|
22 |
2403 19 10 |
Smoking mixtures for pipes and cigarettes |
0.69R per unit |
|
23 |
2403 19 90 |
Other smoking tobacco bearing a brand name |
0.28R per unit |
|
24 |
2403 19 90 |
Other smoking tobacco not bearing a brand name |
0.08R per unit |
|
24A |
2403 91 00 |
“Homogenised” or “reconstituted” tobacco, bearing a brand name |
0.36R per unit |
|
25 |
2404 11 00 |
“Homogenised” or “reconstituted” tobacco,bearing a brand name |
72% |
|
26 |
2403 99 10 |
Chewing tobacco (without lime tube) |
0.56R per unit |
|
27 |
2403 99 10 |
Chewing tobacco (with lime tube) |
0.56R per unit |
|
28 |
2403 99 10 |
Filter khaini |
0.56R per unit |
|
29 |
2403 99 20 |
Preparations containing chewing tobacco |
0.36R per unit |
|
30 |
2403 99 30 |
Jarda scented tobacco |
0.56R per unit |
|
31 |
2403 99 40 |
Snuff |
0.36R per unit |
|
32 |
2403 99 50 |
Preparations containing snuff |
0.36R per unit |
|
33 |
2403 99 60 |
Tobacco extracts and essence bearing a brand name |
0.36R per unit |
|
34 |
2403 99 60 |
Tobacco extracts and essence not bearing a brand name |
0.36R per unit |
|
35 |
2403 99 70 |
Cut tobacco |
0.14R per unit |
|
36 |
2403 99 90 |
Pan masala containing tobacco ‘Gutkha’ |
0.61R per unit |
|
36A |
2403 99 90 |
All goods, other than pan masala containing tobacco 'gutkha', bearing a brand name |
0.43R per unit |
|
36B |
2403 99 90 |
All goods, other than pan masala containing tobacco 'gutkha', not bearing a brand name |
0.43R per unit |
|
37 |
2404 11 00, 2404 19 00 |
All goods, other than pan masala containing tobacco 'gutkha', bearing a brand name |
96% |
|
38 |
2404 11 00, 2404 19 00 |
All goods, other than pan masala containing tobacco 'gutkha', not bearing a brand name |
89% |
|
39 |
2701 |
Coal; briquettes, ovoids and similar solid fuels manufactured from coal. |
Rs.400 per tonne |
|
40 |
2702 |
Lignite, whether or not agglomerated, excluding jet |
Rs.400 per tonne |
|
41 |
2703 |
Peat (including peat litter), whether or not agglomerated |
Rs.400 per tonne |
|
47 |
8703 40, 8703 60 |
Following Vehicles, with both spark-ignition internal combustion reciprocating piston engines and electric motors as motors for propulsion; (a) Motor vehicles cleared as ambulances duly fitted with all the fitments, furniture, and accessories necessary for an ambulance from the factory manufacturing such motor vehicles (b) Three-wheeled vehicles (c) Motor vehicles of engine capacity not exceeding 1200cc and of length not exceeding 4000 mm (d) Motor vehicles other than those mentioned in (a), (b), and (c) above. Explanation.- For the purposes of this entry, the specification of the motor vehicle shall be determined as per the Motor Vehicles Act, 1988 (59 of 1988) and the rules made there under. |
NIL NIL NIL 15% |
|
48 |
8703 50, 8703 70 |
Following Vehicles, with both compression-ignition internal combustion piston engines [diesel- or semi-diesel] and electric motors as motors for propulsion; (a) Motor vehicles cleared as ambulances duly fitted with all the fitments, furniture, and accessories necessary for an ambulance from the factory manufacturing such motor vehicles (b) Three-wheeled vehicles (c) Motor vehicles of engine capacity not exceeding 1500 cc and of length not exceeding 4000 mm (d) Motor vehicles other than those mentioned in (a), (b), and (c) above. Explanation.- For the purposes of this entry, the specification of the motor vehicle shall be determined as per the Motor Vehicles Act, 1988 (59 of 1988) and the rules made there under. |
NIL NIL NIL 15% |
|
50 |
8702, 8703 21 or 8703 22 |
Petrol, Liquefied petroleum gases (LPG) or compressed natural gas (CNG) driven motor vehicles of engine capacity not exceeding 1200cc and of length not exceeding 4000 mm. Explanation.- For the purposes of this entry, the specification of the motor vehicle shall be determined as per the Motor Vehicles Act, 1988 (59 of 1988) and the rules made there under. |
1% |
|
51 |
8702, 8703 31 |
Diesel driven motor vehicles of engine capacity not exceeding 1500 cc and of length not exceeding 4000 mm. Explanation.- For the purposes of this entry, the specification of the motor vehicle shall be determined as per the Motor Vehicles Act, 1988 (59 of 1988) and the rules made there under. |
3% |
|
52 |
[8703 |
Motor vehicles of engine capacity not exceeding 1500 cc |
17% |
|
52A |
8703 |
Motor vehicles of engine capacity exceeding 1500 cc other than motor vehicles specified against entry at S. No 52B |
20% |
|
52B |
8703 |
Motor vehicles of engine capacity exceeding 1500 cc, popularly known as Sports Utility Vehicles (SUVs) including utility vehicles. Explanation. - For the purposes of this entry, SUV includes a motor vehicle of length exceeding 4000 mm and having ground clearance of 170 mm. and above. |
22% |
|
53 |
8711 |
Motorcycles of engine capacity exceeding 350 cc. |
3% |
|
54 |
8802 or 8806 |
Other aircraft (for example, helicopters, aeroplanes), for personal use. |
3% |
|
55 |
8903 |
Yacht and other vessels for pleasure or sports |
3% |
Goods Attracting GST Compensation Cess
The cess applies to the following categories (as per the latest GST Council notification):
| Category | Examples |
|---|---|
| Tobacco & related products | Pan masala, cigarettes, chewing tobacco, tobacco substitutes |
| Coal & solid fuels | Coal, briquettes, solid fuel coal, lignite |
| Petroleum products | Petroleum coke, certain refined petroleum oils |
| Other notified items | Specific luxury goods as notified from time to time |
Current GST Compensation Cess Rates
Rates are fixed by the GST Council and may be revised. The prevailing rates (effective 1 April 2024) are:
| Goods Category | Cess Rate |
|---|---|
| Tobacco & substitutes | 15 % |
| Coal & solid fuels | 5 % |
| Petroleum coke | 1 % |
| Other notified goods | Varies (as per notification) |
How to Calculate GST Compensation Cess
Follow these steps for each taxable supply:
- Identify the taxable value of the supply (base price before GST).
- Determine the applicable GST rate (e.g., 18 %).
- Calculate GST: GST = Taxable Value × GST Rate.
- Identify the cess rate for the specific good.
- Calculate Cess: Cess = Taxable Value × Cess Rate.
- Invoice the customer showing GST and Cess as separate line items.
Example: A manufacturer sells 100 kg of tobacco at ₹200 per kg.
- Taxable value = 100 × 200 = ₹20,000
- GST (18 %) = ₹3,600
- Cess (15 %) = ₹3,000
- Total invoice amount = ₹20,000 + ₹3,600 + ₹3,000 = ₹26,600
Input Tax Credit (ITC) on GST Compensation Cess
Businesses can claim ITC on the GST Compensation Cess paid on inward supplies, provided the following conditions are met:
- The cess is paid on a taxable supply that is used in the course or furtherance of business.
- Proper tax invoice showing the cess amount is retained.
- The recipient files the appropriate GST return (GSTR‑3B) and includes the cess in the ITC claim section.
If the cess is paid on exempted or non‑business consumption, ITC is not available.
Recording GST Compensation Cess in Tally
To ensure compliance, set up a separate Cess ledger in Tally:
- Go to Gateway of Tally → Accounts Info → Ledgers → Create.
- Name the ledger (e.g., "GST Compensation Cess").
- Select Group as Indirect Taxes and enable Applicable for Cess.
- Assign the appropriate tax rate (e.g., 15 %).
- When creating a sales voucher, Tally will automatically prompt for the cess amount after entering GST.
This segregation helps generate accurate GSTR‑1 and GSTR‑3B reports.
Extension of the Cess – What It Means for You
The original five‑year window (2017‑2022) was extended by the GST Council to 31 March 2026. The extension ensures continued compensation for states until the fund’s balance is exhausted. Businesses should continue to charge and remit the cess as per the prevailing rates.
Common Compliance Pitfalls & How to Avoid Them
- Missing Cess on Invoice: Always verify the product falls under the notified list before finalizing the invoice.
- Incorrect Rate: Keep track of periodic GST Council notifications; rates can change.
- ITC Claim Errors: Ensure the cess amount is captured separately in GSTR‑3B; mixing it with regular GST leads to rejection.
