GST Compensation Cess is levied by the Goods and Services Tax (Compensation to States) Act 2017. The object of levying this cess is to compensate the states for the loss of revenue arising due to the implementation of GST on 1st July 2017 for a period of five years or such period as recommended by the GST Council.

Section 1: Short title, extent and commencement

Short title – Goods and Services Tax (Compensation to States) Amendment Act, 2018

Extent – Whole of India

Commencement – 1st July 2017

Section 2: Definitions

Some important definitions from the act are as follows

  • “Cess” means the GST compensation cess levied under section 8
  • “Fund” means the Goods and Services Tax Compensation Fund referred to in section 10
  • “Input tax” in relation to a taxable person, means cess charged on any supply of goods or services or both made to him, import of goods and includes the cess payable on reverse charge basis
  • “Projected growth rate” means the rate of growth projected for the transition period as per section 3 and the rate is 14%
  • “Transition period” means a period of five years from the transition date

Section 4: Base Year

Tax revenue of the state in FY 2015-2016 (during transition period)

Section 5: Base Year Revenue

The base year revenue for a State shall be the sum of the revenue collected by the State and the local bodies during the base year and net of refunds.

Revenue collected by the State and the local bodies during the base year with respect to the following taxes

Inclusion

Exclusion

Value added tax, sales tax, purchase tax, tax collected on works contractor any other tax levied by the concerned State under the erstwhile entry 54 of List-II (State List) of the Seventh Schedule to the Constitution Any taxes levied under any Act enacted under the erstwhile entry 54 of List-II (State List) of the Seventh Schedule to the Constitution, prior to the coming into force of the provisions of the Constitution (One Hundred and First Amendment) Act, 2016, on the sale or purchase of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption.
Central Sales Tax, the entry tax, octroi, local body tax or any other tax levied by the concerned State under the erstwhile entry 52 of List-II (State List) of the Seventh Schedule to the Constitution CST and any cess imposed by the State Government on the sale or purchase of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for human consumption
Duties of excise on medicinal and toilet preparations levied by the Union but collected and retained by the concerned State Government under the erstwhile article 268 of the Constitution the entertainment tax levied by the State but collected by local bodies, under any Act enacted under the erstwhile entry 62 of List-II (State List) of the Seventh Schedule to the Constitution, prior to coming into force of the provisions of the Constitution (One Hundred and First Amendment) Act, 2016
Taxes on luxuries, advertisement
any cess or surcharge or fee leviable

Summary: The base year tax revenue consists of the state’s tax revenues from VAT, CST, entry tax, octrio, local body tax, taxes on luxuries, taxes on advertisement, etc. However, any revenue among these taxes arising related to supply of alcohol for human consumption, certain petroleum products such as petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel will be excluded from the base year revenue.

Section 6: Projected Revenue

Base Year Revenue * Projected Growth rate (i.e 14%) compounded

Example: If the base year revenue for the FY 2015 – 2016 is Rs. 1000 then the projected revenue for the FY 2019 – 2020 will be Rs. 1689 {1000*(1.14)4}.

Section 7: Calculation and release of compensation

The total compensation payable for any financial year during the transition period to any State shall be calculated in the following manner, namely:

Projected Revenue for that particular financial year xxx
Less: Actual Revenue earned by the state (xxx)
Compensation payable to the state xxx

The compensation payable to a State shall be provisionally calculated and released at the end of every 2 months period, and shall be finally calculated for every financial year after the receipt of final revenue figures as audited by the Comptroller and Auditor-General of India.

The projected revenue that could have been earned by the State in absence of the goods and services tax till the end of the relevant two months period of the respective financial year shall be calculated on a pro-rata basis as a percentage of the total projected revenue for any financial year during the transition period, calculated in accordance with section 6.

Example: If the projected revenue for any year calculated is Rs.1000 for calculating the projected revenue that could be earned till the end of the period of 10 months for the purpose of this sub-section shall be Rs.833 {1000*(5/6)}.

In case of any difference between the final compensation amount payable to a State upon receipt of the audited revenue figures from the Comptroller and Auditor-General of India, and the total provisional compensation amount released to a State in the said financial year the same shall be adjusted against release of compensation to the State in the subsequent financial year.

Where no compensation is due to be released in any financial year, and in case any excess amount has been released to a State in the previous year, this amount shall be refunded by the State to the Central Government and such amount shall be credited to the Fund in such manner as may be prescribed.

Section 8: Levy and collection of cess

All taxpayers who are engaged in the supply of selected goods or services other than composition taxpayers will collect compensation cess. This will also include compensation cess chargeable on certain goods imported to India. Compensation cess is levied over and above the amount of GST charged in relation to a particular supply. The calculation is similar to that of GST – the prescribed rate is applied to the transaction value given under section 15 of the CGST Act 2017 to arrive at the cess liability. In case of import of goods the transaction value is the value determined under the Customs Tariff Act, 1975 i.e on the transaction value + Custom duty.

Example: If the goods are imported into India where the assessable value is Rs.1000, GST rate is 18% and Custom duty is 10%. The Compensation cess is calculated on the value of Rs.1100 {1000+(1000*10%)}.

Section 9: Returns, Payments and Refunds

Every taxable person, making a taxable supply of goods or services or both, shall

  • pay the amount of cess as payable under this Act in such manner
  • furnish such returns in such forms, along with the returns to be filed under the Central Goods and Services Tax Act and
  • apply for refunds of such cess paid in such form, as may be prescribed.

Section 10: Crediting proceeds of cess to Fund

The proceeds of the cess leviable under section 8 shall be credited to Goods and Services Tax Compensation Fund and all amounts payable to the States under section 7 shall be paid out of the Fund. Surplus, if any, in the compensation fund at the end of the transition period would be distributed between the Centre (50%) and the states (50%) in the ratio of their base year revenue determined in accordance with the provisions of section 5.

Chart Showing Cess rates under the GST (compensation to states) Act 2017 on Various Goods 

Goods

GST Compensation Cess

Pan masala 60%
Unmanufactured tobacco (with lime tube) – featuring a brand name 65%
Unmanufactured tobacco (without lime tube) – with a brand name 71%
Branded tobacco refuse 61%
Cheroots and Cigar 21% or 4170 per thousand, whichever higher
Cigarillos 21% or 4170 per thousand, whichever higher
Cigarettes containing tobacco excluding filter cigarettes, of length not more than 65mm 5% + 2076 per thousand
Cigarettes containing tobacco apart from filter cigarettes, of length more than 65mm and up to 75mm 5% + 3668 per thousand
Branded ‘hookah’ or ‘gudaku’ tobacco 72%
Chewing tobacco (without 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 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 4000mm. 1%
Diesel driven motor vehicles of engine capacity not exceeding 1500cc and of length not exceeding 4000mm. 3%
Motor vehicles of engine capacity not exceeding 1500 cc 17%
Motor vehicles of engine capacity over 1500cc, popularly known as Sports Utility Vehicles (SUVs) including utility vehicles. 22%

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