- 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 is the tax levied on certain goods and services in addition to the GST to cover the states’ losses in revenue due to the implementation of GST. It came into force under the Goods and Services Tax (Compensation to States) Act 2017.
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 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.
Who is liable to collect GST Cess?
All taxable persons supplying the notified goods (except composition taxpayers) should collect and remit the GST Cess.
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% |
What is the GST Cess Rate applicable on these goods?
The GST Cess rate list for the above-mentioned goods, is available here .
How to calculate GST Cess?
The GST Cess should be calculated on the transaction value. The GST Cess should be levied in addition to the GST taxes i.e. CGST + SGST/UTGST in case of intrastate supplies and IGST in case of interstate supplies. The process typically involves three main steps:
Step 1: Base revenue consideration
Consider the state’s tax revenue for the financial year 2016-17 (before GST was implemented) as the base revenue.
Step 2: Projected revenue
Using this base, a fixed growth rate of 14% per year is applied to calculate the revenue the state would have earned each year if GST had not been implemented. This projection was made over five years, which was the official transition period.
Step 3: Compensation payable calculation
For each financial year, the compensation amount is calculated as the difference between the projected and actual revenues earned by the state under GST.
Compensation Payable = Projected revenue – Actual GST revenue
This compensation is paid to the states every two months. If the actual revenue is lower than the projected revenue, the state receives the difference as compensation from the GST Compensation Fund.
Input tax credit and GST Compensation CESS
Input Tax Credit (ITC) allows businesses to reduce their GST liability by claiming credit for the tax paid on inputs. For example, if a producer pays ₹300 as GST on raw materials and owes ₹500 GST on the final product, they can claim ₹300 as ITC and pay only ₹200.
However, when it comes to GST Compensation Cess, the ITC rules are stricter. If a business pays Compensation CESS on inputs (like coal or tobacco), it can only use that credit to pay compensation CESS on its outputs, not for CGST, SGST, or IGST liabilities. This ensures the CESS serves its specific purpose.
The ITC from compensation cess remains locked within that category and doesn’t lower overall GST dues, maintaining a clear financial channel for compensating states.
