GST Compensation Cess: A New Levy in GST framework

Right from the beginning of talks relating to GST, we all were hoping that with the introduction of GST, there will be “One Nation, one Tax” or at least “One Nation, Few Rates”. But the actual scenario is quite different. GST Council has already decided that there will be 4 rate slab i.e. 5%, 12%, 18%, and 28%. In addition to this there will be a new cess with the name “GST Compensation Cess” for first 5 years on some specified items. Now since government has come out with relevant draft law on this 26^th day of November, 2016, let’s understand this new levy of cess.

Background:

• As we all aware that the GST is a destination cum consumption based tax. Hence the revenue from these taxes would occur to the state where the goods are ultimately consumed.
• Till now the levy of VAT and CST was an origin based tax i.e. the revenue would be going to the treasury of originating state.
• Hence after Introduction of GST, there may be some losses to few manufacturing state like Gujarat and Maharashtra, on the other hand consuming state like Bihar and UP will be in benefit.
• So in order to compensate states from this kind of probable loss, in the Constitution (101^st Amendment) Act, 2016, section 18 has been introduced which read as “Parliament shall, by law, on the recommendation of the Goods and Services Tax Council, provide for compensation to the States for loss of revenue arising on account of implementation of the goods and services tax for a period of five years”.
• Therefore in order to compensate states for loss of revenue, a new cess “GST Compensation Cess” has been introduced by the GST Council which will be levied on Luxury items like high-end cars and demerit goods including tobacco, pan masala and aerated drinks for this period of 5 years.

Levy and Collection of GST Compensation Cess:

• Sec 8 of “GST (Compensation to the States for loss of revenue) bill, 2016” (hereinafter called as compensation bill), is the charging section for levy of GST Compensation Cess.
• For the purpose of providing compensation to the States for loss of revenue arising on account of implementation of the GST for a period of 5 years, GST Compensation Cess will be levied and collected by Central Government.
• On the recommendation of GST Council, Central Government will prescribe the supplies of goods and services, on which GST Compensation Cess will be levied.
• The rate of aforementioned cess will be notified by the Government.
• However as per the press conference held by Hon’ble Chairman of GST Council, the aforementioned Cess will be levied on Luxury items like high-end cars and demerit goods including tobacco, pan masala and aerated drinks in a way that the total incidence of tax remains at almost the current level.
• If a particular supply of goods or services has been notified, the aforementioned cess will be levied on all supplies including import of goods and services, and those supplies on which tax is payable on reverse
• However no such cess shall be payable on such supplies made by a dealer who has been permitted to pay tax under composition scheme under section 8 of CGST Act, 2016. i.e. a composition dealer need not to pay this cess.

Valuation for the purpose of levying GST Compensation Cess:

• Value for the purpose of levying the GST Compensation cess will be same as determined under Section 15 of CGST Act, 2016.
• The value of a supply of goods and/or services shall be the transaction value, that is the price actually paid or payable for the said supply of goods and/or services where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.
• Where the value cannot be determined under aforesaid manner, the same shall be determined in the manner prescribed by government in relevant rules to CGST law.

Returns, Payment and Refunds:

• Along with the normal returns to be filled under CGST Act, 2016, a return for the purpose of the cess need to be furnished in prescribed formats.
• Manner of payment of cess will also be prescribed by government in due course of time by rules.
• Manner of filing application for refunds of cess paid will be prescribed.
• Except for the separate formats to be filed, the provisions of CGST Act, 2016 and rules made thereafter, shall apply in relation to levy and collection of GST Compensation cess.

Availability of Credit of GST Compensation Cess paid:

• Amount paid as GST Compensation cess will be available as input tax credit subject to compliance of all other credit related conditions.
• However Input tax credit in respect of GST Compensation Cess shall be utilized only towards payment of GST Compensation Cess on supply of goods and services leviable under the compensation bill.
• That means credit of cess cannot be utilized against CGST or SGST or IGST payable on outward supply. But can be utilized against cess payable by the supplier.

Applicability of other provisions:

• All other provision of CGST Act, 2016 and relevant rules, including those relating to assessment, ITC, demand, interest, appeals, offences and penalties, shall apply mutatis mutandis to levy of GST Compensation cess on intra-state supply.
• All other provision of IGST Act, 2016 and relevant rules, including those relating to assessment, ITC, demand, interest, appeals, offences and penalties, shall apply mutatis mutandis to levy of GST Compensation cess on inter-state supply.

(Disclaimer: This write up is based on the understanding and interpretation of author and the same is
not intended to be a professional advice.)

[The author is a Chartered Accountant and can also be reached at [email protected]]

Input Credit Scheme Under GST