GST Compensation

Description

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Context

The Central government has released ₹17,000 crore to States towards balance GST compensation, taking the total amount released so far this fiscal to over ₹1.15 lakh crore-the Finance Ministry.
With this release, the Centre has released, in advance, the entire amount of Cess estimated to be collected this year till March-end available for payment of compensation to States.

Background

GST – Goods and Service Tax was launched in India in July 2017 replacing the old taxation system that existed in the country. Compensation cess is charged on goods at their consumption destination and not where they are manufactured. So, manufacturing states like Maharashtra, Gujarat, Haryana, Tamil Nadu etc. feared revenue losses. To cover this issue, the government introduced Compensation Cess under GST.
In order to mobilise resources for compensation, a cess is being levied on such goods, as recommended by the Goods and Services Tax Council, over and above the GST on that item. It is called compensation cess. As on date, compensation cess is levied on products such as pan masala, tobacco, aerated waters and motor cars apart from coal.
It was pre-decided that compensation cess will be levied only for the first 5 years of the GST regime i.e. from July 1st, 2017 to July 1st, 2022. But not GST compensation cess period has been extended till March 2026
Compensation Cess under GST is levied by GST – Compensation to States Act 2017. As per this act, the centre has to compensate the states for loss of their revenue due to the implementation of GST since GST is a consumption-based taxation system.

Who pays compensation to whom? When?

The consumer is required to pay for compensation. It is collected by the Centre which releases it to States. The proceeds of the compensation cess is credited to a non-lapsable fund known as the Goods and Services Tax Compensation Fund in the public account.
All amounts payable to the States as compensation is released bi-monthly, provisionally, from said fund against figures given by the Central accounting authorities. Final adjustments will be done after receiving audited accounts of the year from the Comptroller and Auditor General of India.

Who collects the GST compensation cess?

Compensation cess under GST is collected by all the taxpayers barring a few exceptions. The exceptions include taxpayers who export notified goods and composition, scheme taxpayers. The cess collected is then supposed to be remitted to the central government and the centre then distributes it to the state governments respectively.

Goods covered for GST Compensation Cess

Certain goods have been mentioned in the Compensation to States Act 2017. The compensation cess is applicable in addition to regular GST. It also applies to goods that are imported as per section 3 of the Customs Tariff Act, 1975.

Which goods are notified for charging GST Compensation Cess?

The following goods have been notified so far:

Pan Masala
Tobacco and tobacco products
Cigarettes
Coal, briquettes, ovoids and similar solid fuels manufactured from coal, lignite excluding jet and peat.
Aerated waters
Motor vehicles