Government Extends Levy of GST Compensation Cess Till 31 March 2026
Introduction
The government has extended the date of collection of the GST Compensatory Cess by nearly four years to 31st March 2026. The cess was initially due to be collected on June 30, 2023, but now it will be collected on July 1, 2023. The decision to extend the cess is taken by the GST Council, which is set up under Article 279a(1) of the Constitution of India. The Finance Ministry has notified the decision to extend the time frame to allow the Central government to repay the loans taken by the states in the last two fiscal years. The GST Compensation Cess Act, 2017 provides that the cess will be collected from 1st July 2022.
What is the GST Compensation Fund?
The 2016 Constitution (One Hundred and First Amendment) Act provides a provision that requires the Parliament to provide compensation to the states for any revenue losses incurred due to the introduction of the Goods and Services Tax (GST). This provision, referred to as Section 18, elaborates that the states must be compensated for the revenue losses for a five-year period. In order to ensure that the compensation was paid to the states, the Finance Act (GST) (2017) was passed by the Parliament, which provided for the base year of 2015–16 to be used for the calculation of the GST compensation fund.
Understanding the Imposition of Compensation Cess
The Goods and Services Tax Council has recommended the implementation of a surcharge on certain goods to generate funds for compensatory expenditure. This surcharge, known as the compensation cess, is collected by the Central government from consumers. The surplus is then allocated to the States through the GST Compensation Fund. The Central Accounting Authority has stated that all payments to the States from the Compensation cess fund are made provisionally every two months until the year-end financial statements from the CAG are received.
How to calculate the cess amount step by step?
Step 1: For the participating states, the base revenue for the 2016–2017 period will be taken into account.
Step 2: For the five-year period covered by the cess, the state’s annual growth rate is estimated to be 14%. Consequently, the total revenue for a given state’s fiscal year that could have been generated if the cess had not been in place is calculated.
Step 3: The amount is then determined and distributed on a bi-monthly basis. This system is expected to remain in effect until the 1st of July, 2022.
GST Compensation Cess Rates for Goods (Updated as of April 1, 2023)
|
Goods or Service |
GST Cess
|
|
Pan Masala |
60%
|
|
Aerated waters |
12%
|
|
Lemonade |
12%
|
| Others |
12% |
|
Unmanufactured tobacco bearing a brand name |
65%
|
|
Tobacco refuse, bearing a brand name |
61%
|
|
Chewing tobacco (without lime tube) |
160%
|
|
Filter khaini |
160%
|
|
Pan masala containing tobacco ‘Gutkha’ |
204%
|
|
Cigar and cheroots |
21% or Rs. 4170 per thousand, whichever is higher
|
|
Cigarillos |
21% or Rs. 4170 per thousand, whichever is higher |
|
Cigarettes of tobacco substitutes |
Rs.4006 per thousand
|
|
Cigarillos of tobacco substitutes |
12.5% or Rs. 4,006 per thousand whichever is higher
|
|
Hookah’ or ‘gudaku’ tobacco bearing a
|
72%
|
|
Smoking mixtures for pipes and cigarettes |
290%
|
|
“Homogenised” or “reconstituted” tobacco bearing a brand name |
72%
|
|
Preparations containing chewing tobacco |
72%
|
|
Cut Tobacco |
20%
|
|
Coal; briquettes, ovoids, and similar solid fuels manufactured from coal. |
Rs.400 per tonne
|
|
Lignite, whether agglomerated, excluding jet |
Rs.400 per tonne
|
|
Peat (including agglomerated) |
Rs.400 per tonne
|
|
Motor vehicles (10<persons <13) |
15%
|
|
Small Cars (length < 4 m ; Petrol<1200 cc ) |
1%
|
|
Small Cars (length < 4 m ; Diesel < 1500 cc)
|
3%
|
|
Mid Segment Cars (engine < 1500 cc) |
15% |
|
Large Cars (engine > 1500 cc) |
15%
|
|
Sports Utility Vehicles (length > 4m ; engine > 1500 cc; ground clearance > 170 mm) |
15%
|
|
Mid-Segment Hybrid Cars (engine < 1500 cc) |
15%
|
|
Hybrid motor vehicles > 1500 cc |
15% |
|
Hydrogen vehicles based on fuel cell tech > 4m |
15%
|
|
Motorcycles (engine > 350 cc) |
3%
|
|
Aircraft for personal use. |
3%
|
Conclusion
The issue has been the subject of a lot of debate and comments from the states, who have said that if the compensation is not extended, the consequences for the states will be serious and even tragic in some cases. If the safeguard revenue provision is not retained, it has been suggested that the existing 50:50 ratio between the central and state GST should be changed to 70-80% for the state GST and 20-30% for the CGST. However, the Centre has said that the pandemic has extended the cess by another four years and that it is not feasible to offer additional compensation at this stage. It is yet to be seen if the compensation period for the state GST will be extended or not, and a final decision on this may be taken by the next GST Council, which is scheduled to take place at the beginning of August.
Suggested Read: GST Rate on Electric Vehicles and Electric Cars
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