GST Cess in India: Rate, Applicability, and Calculation Explained

Implementing the Goods and Services Tax (GST) in 2017 integrated multiple types of indirect taxes into a single tax structure, changed the system of indirect taxation in the country. However this change impacted the income of a few state governments that were net exporters of goods and services. To solve the revenue shortfall problem, the central government created a special GST Compensation Cess. In this article, I will outline what cesses under GST are, their justification, calculation method, and the applicable list of Goods and Services.

What is the GST Compensation Cess?

GST Compensation Cess is levied under Section 8 of the Goods and Services Tax (Compensation to States) Act, 2017. It is imposed on the supply of select goods and services, both intra-state and inter-state, in addition to the regular CGST, SGST/UTGST, and IGST. The primary goal of this cess is to compensate states for any revenue shortfall post-GST implementation.

Why is GST Cess Levied?

Under Section 8 of the Goods and Services Tax (Compensation to States) Act, 2017, a GST Compensation Cess is applicable. This applies to the intra- and inter-state supply of specific services and goods and is added on top of the standard CGST, SGST/UTGST and IGST. This cess is primarily aimed at covering revenue deficits of states’, if any, after the implementation of GST.

How GST Compensation Cess is Used

The cess that is collected gets deposited into a fund named the GST Compensation Fund which does not lapse or expire. That amount is allocated every month to states facing any sort of deficit. If there is any leftover after this compensation duration then it will be split between the center and state governments according to a predetermined revenue-sharing formula.

Applicability of GST Cess

Cess applies to the provision of goods and services as notified by the Central Government. In this regard, it covers:

Supplies within a state and between states

Imports of certain goods

All taxpayers except those on the composition scheme

Key Goods Attracting GST Cess

Category	Examples	GST Cess Rate
Pan Masala	Pan Masala	60%
Tobacco Products	Cigarettes, Gutkha, Hookah tobacco	Up to 204% or a fixed amount per unit
Aerated Drinks	Lemonade, Sweetened soda	12%
Coal & Fuels	Coal, Lignite, Peat	Rs. 400/tonne
Motor Vehicles	SUVs, Mid & Large cars	1% to 15%
Luxury & Sin Goods	Yachts, Aircrafts	3%

How to Calculate GST Cess

GST Cess is calculated on the transaction value or assessable value (in the case of imports). For example:

1. Import Value: Rs. 100

2. Customs Duty (10%): Rs. 10

3. Total Assessable Value for IGST & Cess: Rs. 110

4. IGST (18%): Rs. 19.80

5. If applicable, GST Cess would also be calculated on Rs. 110 as per the specified rate.

Note: GST Cess is levied in addition to GST.

Input Tax Credit (ITC) on GST Cess

ITC on GST Cess has a restriction, it cannot be utilized for anything else aside from paying for the GST Cess on output supply.

Payments cannot be made for CGST, SGST, or IGST.

GST Cess Distribution Among States

Details of compensation to the states are calculated based on:

Expected revenue (which is calculated on the assumption of a 14% increase every year from the 2015-16 base year revenue)

Actual GST collections

Shortfall = Projected revenue - Actual revenue

This shortfall is compensated to the states every month through the GST Compensation Fund.

Conclusion

The GST Compensation Cess is necessary for allowing states to smoothly make the transition to the Goods and Services Tax (GST) System without having their revenue being compromised. Although only a few goods and services are taxed with it, it helps balance the paying states economy with the receiving states. Knowing how it's computed, when it is used, and where its boundaries lie is crucial for businesses with high-value and luxury goods.

FAQs

1. What is the GST Compensation Cess?

Products and services that fall under the umbrella of luxury or demerit will be taxed with an additional GST Compensation Cess which is issued to compensate the state’s expenditures post GST implementation.

2. Who has to pay GST Cess?

Every taxpayer, except those under the composition scheme, supplying goods and/or services mentioned in the cess notification is liable to pay GST Compensation Cess.

3. Is GST Cess applicable on imports?

That is correct, see goods of a certain description attract GST Compensation Cess upon importation.

4. What is the duration of GST Compensation to states?

At first, they were sure the restitution would last five years (up to June 2022), but the government prolonged the collection of GST Cess until March 2026 to pay off loans contracted during the Coronavirus period.

5. How is GST Cess calculated?

In addition to regular GST, it is also calculated on the transaction value (for domestic supplies), or assessable value (for imports). The cess rate is dependent on the product category.