GST CESS - Rate, Calculation and Applicability

GST cess is a compensation cess levied on certain goods or services
to provide compensation to states for loss of revenue due to the implementation of GST.

CESS in GST is levied under section 8 of The Goods and Services Tax Act, 2017. It is a tax levied both on intra-state and inter-state supply of goods or services to compensate the state revenue loses post GST implementation. We will have a look at the rate of GST cess, what it applies to and how to properly calculate it.

Why is GST Cess applied and how is it used?

Because GST is a consumption based tax, the state where the consumption of goods happens would be eligible for indirect tax revenue. But since GST eliminated all indirect taxes, some states that rely on export of goods or services are expected to have a loss of indirect tax revenue.

To compensate for this loss, the GST compensation CESS has been introduced by the central government for a period of 5 years from GST implementation, as per the goods and services tax act from 2017.

All the revenue that comes from the GST compensation cess will be credited to a non-lapsable fund called the Goods and Services Tax Compensation Fund. The fund would be used for compensating tax revenue loss due to GST to the affected states. Any funds that remain unutilised at the end of the transition period would be shared in half between the Central Government and all State Governments.

What does GST Cess apply to?

GST cess is applied to all goods or services that traded either intrastate or interstate by GST registered businesses that do not fall under the composition scheme, for the following categories:

  • Pan Masala

  • Aerated waters

  • Tobacco and tobacco products

  • Coal, briquettes, ovoids and similar solid fuels manufactured from coal, lignite, whether or not agglomerated, excluding jet, peat (including peat litter), whether or not agglomerated

  • Motor cars and other motor vehicles principally designed for the transport of people (other than motor vehicles for the transport of ten or more people, including the driver), including station wagons and racing cars.

  • Any other supplies as notified from time to time.

A full official list of GST Cess rates can be found here.

How to calculate GST cess?

In the case where goods or services attract CESS, it must be calculated on the basis of the taxable value of the supply, as per the government approved rates. In case CESS is applicable on any goods imported into India, then it must be levied and collected along with IGST and customs tax. .

NOTE: Input credit can be availed on CESS paid for inward supplies. However, any credit on CESS paid can only be used towards payment of CESS liability.

Let’s take an example of how GST Cess is calculated.

Company Sorina TEST 123 in Maharashtra supplies 1 car @ 100000 INR to company Ab company in Maharashtra. This is a small diesel car for the company’s use, it has a motor under 1500C so it attracts a 3% CESS rate. The GST rate that applies to motor cars is 28%.


Motor car

100000

Add GST (CGST+SGST/IGST) @ 28%

28000

GST Cess @ 3% (10000*0.03)

3000

Total

131000



The invoice that Sorina TEST 123 from Maharashtra issues to Ab Company in Maharashtra is shown below.

GST Cess

You can use Sleek Bill to make invoices just like this one plus many other necessary documents in the GST approved format.




GST Explained


GST, short for Goods and Services tax, is a new tax that will be imposed on the sale and purchase of goods and services in India. GST is meant to replace all taxes in India with a single unified tax applied to value addition instead of the total value of the product at each stage in the supply chain.

This method provides credit for the input tax paid on the purchase of goods and services, which can be offset with the tax to be paid on the supply of goods and services. As a result, this reduces the overall manufacturing cost, with the end customer paying less.

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With certain current taxes remaining, the following goods and services will be fully or partially exempted from the GST

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Free movement of goods: Business owners will be able to sell more in other states without having to worry about interstate transaction costs. With GST, the entry tax will be eliminated, which will save time and money spent.

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Currently, there are many indirect taxes that both the state and central governments are collecting on every purchase and sale.

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The GST will follow a similar model with the one before it

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GST will have a 4-tier tax structure

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One of the main reasons for GST being introduced in India is the tax burden that falls both on companies and consumers. With the current tax system, there are multiple taxes added at each stage of the supply chain, without taking credit for taxes paid at previous stages. As a result, the end cost of the product does not clearly show the actual cost of the product and how much tax was applied. This cascading structure is too complex and inefficient.

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For inter-state transactions, the Centre will levy Integrated GST (IGST), which is equal to the average of the CGST and SGST rates. After applying IGST, CGST and SGST credits received from purchases, the seller will then pay the remaining IGST on the added value.

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Businesses with turnover revenue of 20 lakhs and above will have to register and file for GST returns, with a threshold of 10 lakhs for businesses in the north east and hill states.

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A combination of CGST and SGST will be applied to the import of goods and services that come to India. Tax benefits and credits will be given to the state where the imported goods and services are consumed.

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