When consumers pay the goods and services tax, the taxes are applied at the place of supply or the buyer’s location. The GST Council worried that states focused on exports or manufacturing might see a drop in revenue as a result. To make up for these potential losses, it created a GST compensation cess.
What Is the Compensation Cess?
A cess is simply a tax or levy. “Compensation” refers to the fact that this tax is designed to compensate some of the states for their losses. The compensation cess applies to the sale of certain items in both intra- and interstate transactions. The funds go to the central government, and are distributed to the states to cover their revenue losses. This temporary tax is set to last for five years from the implementation of the GST, meaning it should expire in 2022.
How Much is the Compensation Cess?
The GST compensation cess rate varies based on the type of goods. For instance, the compensation cess on a petrol car is 1%, but the compensation cess on tobacco is 36%. This rate is applied to the price of the item. It does not take into account any other GST or any other taxes or service charges..
To explain, imagine you are buying cigarettes above 75 mm. The cost is ₹300. The state GST of 14% adds ₹42 to the cost, and the 14% central GST puts on an additional ₹42. That brings the subtotal to ₹384. The compensation cess applies to the original price of ₹300. It does not apply to the ₹384.
Can You Claim Input Credits for the Compensation Cess?
If you pay the compensation cess, you may be able to claim input credits. You earn these credits when you pay the compensation cess on purchases for your business, and they can help to lower your GST bill. But you can only use cess credits against compensation cess that you owe. You can’t use these credits to reduce other GST you owe.
Let’s say you purchased some supplies for your manufacturing business, paying ₹100 in compensation cess. During the same tax period, you also collect ₹300 in compensation cess on the items you sell. When you file your GST return, note that you collected ₹300 in compensation cess and that you paid ₹100 in compensation cess. That reduces your total liability for compensation cess down to just ₹200.
This process actually happens over a series of three monthly returns. The first return covers the amount you owe. The second return outlines the input credits you have earned by showing the compensation cess you have paid to your suppliers. And the third return reconciles these numbers.
Keeping track of your GST obligations can get tricky. To make the process easier, you may want to invest in cloud-based accounting software such as QuickBooks. This GST-ready software has all the rates you should charge your customers. It can also help you with your GST returns, and it gets updated automatically as the rules change.