GST Compensation Cess is a crucial component of the Goods and Services Tax (GST) framework in India. It is a unique type of tax imposed under the Goods and Services Tax (Compensation to States) Act 2017. The primary objective behind the imposition of this cess is to compensate the states for any loss of revenue they may experience as a result of the implementation of GST, which was rolled out on July 1, 2017.
To address this concern, the Indian government set up a mechanism to provide financial assistance to states for a specific period. Initially, the compensation period was fixed at five years from the launch of GST. However, it can be extended further based on recommendations from the GST Council, which consists of representatives from both the central and state governments.
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The idea of GST Compensation Cess was introduced to ensure that no state faces a financial disadvantage due to the transition to the new GST regime. When GST was implemented, various taxes and levies that were previously collected by individual states were subsumed into a single nationwide tax. While this streamlined taxation and made it more efficient, it also meant that some states might see a decline in their revenue collection.
To address this concern, the Indian government set up a mechanism to provide financial assistance to states for a specific period. Initially, the compensation period was fixed at five years from the launch of GST. However, it can be extended further based on recommendations from the GST Council, which consists of representatives from both the central and state governments.
GST Compensation Cess is primarily levied on a select category of goods and services, often referred to as "sin" or "luxury" items. These are goods and services that are considered non-essential and may have a detrimental impact on public health or the environment.
The revenue collected through this cess is specifically earmarked for compensating states for any revenue shortfall during the designated period. It ensures that states do not experience financial hardship during the transition to the GST system.
As the GST framework evolves and adapts to changing economic conditions, staying informed about GST Compensation Cess is essential for businesses and taxpayers. This knowledge empowers them to navigate the tax landscape effectively and fulfill their tax obligations while contributing to the nation's economic growth.
For the latest updates and insights on GST Compensation Cess, consult reliable sources and keep abreast of changes in GST regulations.
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The collection of GST Compensation Cess is a critical aspect of the Goods and Services Tax (GST) framework in India. It is imposed on specific categories of goods and services to compensate states for any loss of revenue arising from the implementation of GST. Understanding who is required to collect GST Compensation Cess is essential for businesses and taxpayers. Here's a breakdown of the entities involved:
Taxpayers who are engaged in the supply of selected goods or services, other than exporters, are required to collect GST Compensation Cess. These selected goods or services typically fall into the category of "sin" or "luxury" items, such as tobacco products, aerated drinks, and luxury cars. Cess is levied on these goods and services to offset any revenue losses incurred by states.
Composition taxpayers, who have opted for Composition Scheme under GST, are also obligated to collect and remit GST Compensation Cess where applicable. Composition Scheme is designed for small businesses with a turnover threshold, and it involves simplified compliance requirements. However, composition taxpayers are still responsible for collecting compensation cess on eligible supplies.
In addition to domestic transactions, compensation cess is chargeable on certain goods imported into India. These imported goods may include items subject to compensation cess under GST regulations. Importers are required to pay the applicable cess on these goods to ensure that the compensation mechanism operates effectively.
It's important to note that when compensation cess is paid on goods or services that are subsequently exported, the exporter has the option to claim a refund of the cess paid. This refund provision ensures that the compensation cess does not become a burden on exporters and does not affect their competitiveness in international markets.
| Goods Description | GST Compensation Cess Rate |
|---|---|
| Cut tobacco | 0.14Rs per unit |
| Unmanufactured tobacco (with lime tube) - featuring a brand name | 0.36Rs per unit |
| Unmanufactured tobacco (without lime tube) - with a brand name | 0.36Rs per unit |
| Branded tobacco refuse | 0.32Rs per unit |
| Tobacco extracts and essence bearing a brand name | 0.36Rs per unit |
| Tobacco extracts and essence not bearing a brand name | 0.36Rs per unit |
| Filter khaini | 0.56Rs per unit |
| Jarda scented tobacco | 0.56Rs per unit |
| Cheroots and Cigar | 21% or 4170 per thousand, whichever is higher |
| Cigarillos | 21% or Rs. 4170 per thousand, whichever is higher |
| Cigarettes containing tobacco excluding filter cigarettes, of length not more than 65mm | 5% + Rs. 2076 per thousand |
| Cigarettes containing tobacco apart from filter cigarettes, of length more than 65mm and up to 75mm | 5% + Rs. 3668 per thousand |
| Filter cigarettes of length (including the length of the filter, the length of filter being 11 millimeters or its actual length, whichever is more) not exceeding 65 millimeters | 5% + Rs. 2076 per thousand |
| Filter cigarettes of length (including the length of the filter, the length of filter being 11 millimeters or its actual length, whichever is more) exceeding 65 millimeters but not exceeding 70 millimeters | 5% + Rs. 2747 per thousand |
| Filter cigarettes of length (including the length of the filter, the length of filter being 11 millimeters or its actual length, whichever is more) exceeding 70 millimeters but not exceeding 75 millimeters | 5% + Rs. 3668 per thousand |
| Cigarettes of tobacco substitutes | Rs. 4006 per thousand |
| Cigarillos of tobacco substitutes | 12.5% or Rs. 4,006 per thousand whichever is higher |
| Smoking mixtures for pipes and cigarettes | 290% |
| Branded 'hookah' or 'gudaku' tobacco | 0.36Rs per unit |
| Motor vehicles, excluding ambulances, three-wheelers and vehicles of engine capacity not exceeding 1500cc and of length not exceeding 4000 mm, with both spark-ignition internal combustion reciprocating piston engine and electric motor as motors for propulsion or with both compression-ignition internal combustion piston engine [diesel-or semi diesel] and electric motor as motors for propulsion | 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 exceeding 1500 cc other than motor vehicles specified against entry at S. No 52B | 20% |
| Motor vehicles of engine capacity over 1500cc, popularly known as Sports Utility Vehicles (SUVs) including utility vehicles. | 22% |
| Chewing tobacco (with lime tube) | 0.56Rs per unit |
| Preparations containing chewing tobacco | 0.61Rs per unit |
| Pan masala (gutkha) containing tobacco | 0.61Rs per unit |
| All goods, other than pan masala containing tobacco 'gutkha', bearing a brand name | 0.43Rs per unit |
| All goods, other than pan masala containing tobacco 'gutkha', not bearing a brand name | 0.43Rs per unit |
| Snuff | 0.36Rs per unit |
| Preparations containing snuff | 0.36Rs per unit |
| 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% |
| Lemonade | 12% |
| Others | 12% |
| Motorcycles of engine capacity exceeding 350 cc | 3% |
| Aircrafts (including helicopters, etc.) for personal use | 3% |
| Yacht and other vessels for pleasure or sports | 3% |
| Motor vehicles for the transport of not more than 13 persons, including the driver | 15% |
The distribution of compensation cess to the states is based on a formula that takes into account the base revenue, projected revenue, and actual revenue earned by each state. Here is how it works:
This is the tax revenue of the state in the fiscal year 2016-17.
A growth rate is assumed, typically around 14%, and projected revenue is calculated for each financial year based on this growth rate.
The compensation payable to the state for each fiscal year is calculated as follows:
Compensation Payable to the State= (Projected Revenue for that particular financial year−Actual Revenue earned by the state)
Compensation Payable to the State= ( Projected Revenue for that particular financial year−Actual Revenue earned by the state)
In this formula, the projected revenue for the specific financial year is subtracted from the actual revenue earned by the state during that year. The resulting amount represents the compensation payable to the state.
This mechanism ensures that states are compensated for any revenue shortfall arising from the implementation of GST, based on the projected revenue growth and the actual revenue collected by each state. It helps in maintaining the fiscal stability of the states during the transition to the GST regime.
To acquire funds for distributing compensation cess, especially during economic slowdowns like the COVID-19 pandemic, the central government has several options at its disposal:
The government can consider revising the formula used to calculate compensation cess. This may involve adjusting the base revenue, growth rate assumptions, or other parameters to ensure that the compensation cess collection aligns better with the revenue requirements.
Another option is to increase the rate of the composition cess applied to specific goods or services. This would result in higher cess collections, which can be used to compensate the states.
The government can expand the list of goods or services that are subject to compensation cess. By including additional commodities, the cess base can be broadened, leading to increased revenue.
During economic crises, the government may resort to borrowing funds from the financial market to meet its fiscal obligations, including the distribution of compensation cess. These funds can be used to bridge any shortfall in the cess collections.
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