GST – Goods and Service Tax was launched in India in July 2017 replacing the old taxation system that existed in the country. Compensation cess is charged on goods at their consumption destination and not where they are manufactured. So manufacturing states like Maharashtra, Gujarat, Haryana, Tamil Nadu etc. feared revenue losses and to cover this issue, the government introduced Compensation Cess under GST. It was pre-decided that compensation cess will be levied only for the first 5 years of the GST regime i.e. from July 1st, 2017 to July 1st, 2022.
What is Compensation Cess under GST?
Compensation Cess under GST is levied by GST – Compensation to States Act 2017. As per this act, the centre has to compensate the states for loss of their revenue due to the implementation of GST since GST is a consumption-based taxation system.
Who collects the GST compensation cess?
Compensation cess under GST is collected by all the taxpayers barring a few exceptions. The exceptions include taxpayers who export notified goods and composition, scheme taxpayers. The cess collected is then supposed to be remitted to the central government and the centre then distributes it to the state governments respectively.
Goods covered for GST Compensation Cess
Certain goods have been mentioned in the Compensation to States Act 2017. The compensation cess is applicable in addition to regular GST. It also applies to goods that are imported as per section 3 of the Customs Tariff Act, 1975.
GST Compensation Cess Rates of Goods
| Goods | GST Compensation Cess |
| Pan Masala | 60% |
| Unmanufactured tobacco (with lime tube) – featuring a brand name | 65% |
| Unmanufactured tobacco (w/o lime tube) – with the brand name | 71% |
| Branded Tobacco refuse | 61% |
| Cheroots and Cigar | The higher amount between 21% or Rs. 4170 per thousand |
| Cigarillos | Higher among 21% or Rs. 4170 per thousand |
| Cigarettes containing tobacco excluding filter cigarettes, of length not more than 65 mm | 5% + Rs.2076 per thousand |
| Cigarettes containing tobacco apart from filter cigarettes, of length more than 65 mm and up to 75 mm | 5% + Rs.3668 per thousand |
| Branded ‘Hookah’ or ‘gudaku’ tobacco | 72% |
| Chewing tobacco (w/o 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 | Rs. 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 4000 mm. | 1% |
| Diesel driven motor vehicles of engine capacity not exceeding 1500cc and of length not exceeding 4000 mm. | 3% |
| Motor vehicles of engine capacity not exceeding 1500 cc | 17% |
| Motor vehicles of engine capacity over 1500 cc, popularly known as Sports Utility Vehicles (SUVs) including utility vehicles. | 22% |
Source: Central Board of Indirect Taxes and Customs, Goods and Services Tax, updated – September 2019.
Using ITC of Compensation Cess under GST
ITC – Input Tax Credit of Compensation cess can only be used under a certain scenario. If a taxpayer wishes to set off the liability of compensation cess ascending due to outward supply only then ITC on compensation cess can be used.
Calculating Compensation Cess under GST
Calculating Compensation Cess under GST is very similar to calculating GST. Compensation cess is levied above the amount of GST charged on a particular good or service. The prescribed rate is applied to the transaction value given under section 15 of the CGST Act 2017.
| Notification No. & Date of Issue | English | Subject |
| Notification 01/2021-Compensation Cess (Rate),dt. 30-09-2021 | View (7 KB) | Seeks to amend notification No. 1/2017- Compensation Cess(Rate). |
| Notification 03/2019-Compensation Cess (Rate), dt. 30-09-2019 | View (76 KB) | Seeks to disallow the refund of compensation cess in case of inverted duty structure for tobacco and manufactured tobacco substitutes. |
| 02/2019-Compensation Cess (Rate), dt. 30-09-2019 | View (159 KB) | Seeks to amend notification No. 1/2017-Compensation Cess (Rate), dated 28.6.2017 on the recommendations of the GST Council in its 37th meeting dated 20.09.2019. |
| 01/2019-Compensation Cess (Rate), dt. 29-06-2019 | View (84 KB) | Exempts any supply of goods by a retail outlet established in the departure area of an international airport, beyond the immigration counters, to an outgoing international tourist. |
| 02/2018-Compensation Cess (Rate), dt. 26-07-2018 | View (122 KB) | Seeks to amend Notification No. 1/2017 -Compensation Cess (Rate) dated 28.06.2017 to give effect to the recommendations of the GST Council in its 28th meeting held on 21.07.2018 |
| 01/2018-Compensation Cess (Rate), dt. 25-01-2018 | View (122 KB) | Seeks to amend Notification No.1/2017-Compensation Cess (Rate). |
| 07/2017-Compensation Cess (Rate), dt. 13-10-2017 | View (187 KB) | Seeks to prescribe compensation cess rate on the leasing of motor vehicles. |
| 06/2017-Compensation Cess (Rate), dt. 13-10-2017 | View (117 KB) | Seeks to amend notification No. 2/2017-Compensation Cess (Rate) regarding reduction in cess rates for leasing of motor vehicles purchased and leased prior to 01.07.2017. |
| 05/2017-Compensation Cess (Rate), dt. 11-09-2017 | View (441 KB) | The notification amends the rates of compensation cess on various motor vehicles. |
| 04/2017-Compensation Cess (Rate), dt. 20-07-2017 | View (82 KB) | Seeks to exempt intra-State supplies of second-hand goods received by a registered person, dealing in buying and selling of second-hand goods and who pays the goods and services tax compensation cess on the value of outward supply of such second-hand goods, as determined under sub-rule (5) of rule 32 of the Central Goods and Services Tax Rules, 2017, from any supplier, who is not registered, from the whole of the goods and services tax compensation cess leviable thereon under section 8 of the Goods and Services Tax (Compensation to States) Act, read with sub-section (4) of Section 9 of the Central Goods and Services Tax Act |
| 03/2017-Compensation Cess (Rate), dt. 18-07-2017 | View (253 KB) | Seeks to amend notification No. 1/2017- Compensation Cess (Rate), dated 28th, June 2017 so as to increase the Compensation Cess rates on cigarettes as mentioned in the notification with effect from 18th, July 2017 |
| 02/2017-Compensation Cess (Rate), dt. 28-06-2017 | To notify the rates of compensation cess on supply of specified services | |
| 01/2017-Compensation Cess (Rate), dt. 28-06-2017 | Seeks to notify Rates of goods and services tax compensation cess under Goods and Services Tax (Compensation to States) Act, 2017 (15 of 2017). |
Link to Compensation Cess (Rate) Notifications: Rate Notification
Latest Update on GST Compensation Cess:
As per the latest update, the centre has released GST compensation of Rs. 17,000 crore to states on November 3, 2021. Thus, the total amount released to states/UTs for the financial year 2021-22 accounts to Rs. 60,000 crore so far. As per the decision of GST Council, back to back loan of Rs.1.59 lakh crore has already been released in lieu of shortfall in the release of GST Compensation during the current financial year.
The GST Compensation Cess was a hot topic of discussion in the 45th GST Council Meeting. Finance Minister Nirmala Sitharaman assured the states that the delay was due to the pandemic and the compensation cess will be duly paid. The compensation scenario was discussed at length in the council meeting.
Update as per the new press release dated 28th April 2022
To guarantee that States have sufficient and timely resources to address Covid and related concerns, the Centre borrowed Rs. 1.1 lakh crore in 2020-21 and Rs. 1.59 lakh crore in 2021-22 which was transferred ahead to all the States back-to-back. Rs. 2.78 lakh crore in compensation has already been granted to states for the 2020-21 fiscal year, with nothing outstanding for the next year. Furthermore, States have already received compensation for 8 out of the 10 months of 2021-22. The pending amount will be released once the cess money is received in the compensation fund.
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The states have been facing the issue of revenue losses for a while and now since a few months due to the COVID-19 lockdown, it further went down. In the recent 41st GST council meeting that was scheduled on 27th August 2020, the states discussed the matter of non-release of compensation cess from the Centre to the States for some time. The shortfall is estimated to Rs 2.35 lakh crore in 2020-21. However, the central government stated that of this Rs 2.35 lakh crore, only Rs 97,000 crore is on account of GST implementation. The rest of the shortfall is due to Covid-19 and not provided for under the GST Constitutional Amendment. The finance ministry has now proposed two options to states to resolve the issue of compensation cess shortfall. Read our article on the 41st GST Council meeting for further details.
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