The GST regime is designed to reduce prices for consumers and make compliance easier for businesses. Unfortunately, because of the way the law is structured, individual states in India are likely to lose money. To help those states stay afloat as the country adjusts to GST, the government created the compensation cess. If you run a business in India, that GST cess may affect your taxes and cash flow. So what is GST Cess?
Understanding What Is GST Cess
GST is a destination-based tax, which means that taxes from products you sell go to the buyer’s state. This is different from India’s earlier VAT regime, where the tax went to the seller’s state. That means that some states stand to lose money, particularly if they have high production but low consumption.
To help ensure states get the tax revenue they need to operate, the government created the compensation cess. This is a levy that is charged on certain types of goods and you must pay it in addition to any required GST. This cess applies to interstate sales, intrastate sales, and imports. It does not apply to exports. The government will collect, then distribute the cess to states to help them meet minimum revenue levels. This ensures that manufacturing-heavy states have enough money to operate.
What Goods Are Subject To the Compensation Cess?
The Compensation Cess Act identifies specific products that qualify for the cess. These include:
- Pan masala
- Tobacco, tobacco products, and tobacco substitutes
- Coal and solid fuels that are made from coal
- Aerated waters
- Motor cars
- Motor vehicles designed to transport 10 or more people
How Much Is the Compensation Cess?
The compensation cess rate varies by the type of product. And the cess is calculated based on the value of the product without GST.
Coal, for example, comes with a cess of ₹400 per tonne. That means that if you sell 2 tonnes of coal that have a value of ₹10,000, you’ll pay an extra ₹800 cess. At a rate of 5%, GST for the shipment is ₹500. That means that your total tax liability for the coal is ₹1,300. When the cess ends in 2022, you’ll only pay the GST of ₹500.
As of May 2018, the maximum cess rates that can be charged are:
- Pan masala: 60% of the value
- Aerated waters: 12% of the value
- Motor cars: 15% of the value
- Motor vehicles designed to transport 13 or more people: 15% of the value
Keep in mind that the actual cess rates are often different from the maximums above. As of May 2018, pan masala has an actual cess of 60%. These rates can change based on GST council recommendations; you can find all of the current rates on the CBEC website.
How Long Does the Compensation Cess Last?
The GST law designed the compensation cess to last for five years. This means that the cess is set to end in July of 2022. The five-year period gives states time to adjust and transition to the regime. This time limit isn’t set in stone. the law also states that the government may change it based on the recommendations of the GST council.
Since GST was introduced, the compensation cess has gone through several changes. If your company buys or sells luxury goods, staying updated on current rates can help you manage your cash flow and tax liability.