Ch 40 - GST Compensation CASs | GST Saral by CA Dhruv Aggarwal PDF Download

 Page 1


CA DHRUV AGRAWAL – National Chairman Taxation Committee-All India Confederation of Small & Micro Industries Association  
 
 
 
 
 
 
 
 
 
 
 
 
CHAPTER 40 - GST Compensati on Cess 
 
 
 
 
 
CHAPTER 40 
 
GST Compensation Cess 
 
EXECUTIVE SUMMARY 
 
?   Some  States,  particularly  producing  States  like  Maharashtra,  Gujarat,  Tamil  Nadu,  Punjab, 
Karnataka will lose tax revenue due to abolition of Central Sales Tax. 
?   Such States will be paid compensation by Central Government for five years. 
?   To enable Central Government to pay the compensation, a GST Compensation Cess is proposed to 
be levied on supply of goods or services or both within India and also on import of goods and 
services. 
?   Sections 3 to 7 of GST Cess Act provide for mode of calculating compensation payable to States. 
?   Input Tax Credit of GST Compensation Cess will be available, but the input tax credit in respect of 
GST Compensation Cess can be utilised only towards payment of GST Compensation Cess. 
?   Broadly, maximum GST Cess rates are as follows - (a) Pan Masala - 150% (b) Tobacco and 
tobacco products - Rs 4,170 rupees per thousand sticks or 290% ad valorem or a combination 
thereof (c) Coal, briquettes, ovoids and similar solid fuels manufactured  from coal - Rs 400 per 
tonne (d) Aerated waters - 15% (e)Motor cars and motor vehicles for transport of less than ten 
persons, including drive and also on station wagons and racing cars - 15%. 
?   Actual  rate  of  GST  Compensation  Cess  is  expected  to  be  12%  (where  15%  maximum  is 
applicable). Other goods and a l services are most likely to be exempted from GST compensation 
Cess. 
40.1 Background of GST Compensation Cess 
 
Presently, Central Sales Tax (CST) is co lected by State Government from which goods are supplied. Thus, 
CST is a production based tax. Since GST is a consumption based tax, the State producing goods will not get 
tax revenue out of supply of goods. Thus, a big revenue loss is expected to producing States like Maharashtra, 
Gujarat, Tamil Nadu, Karnataka, Andhra Pradesh, Haryana etc. Consuming States like Bihar, Uttar Pradesh, 
Madhya Pradesh, Chhattisgarh, Kerala, Orissa will be gainers in GST. 
Hence specific provision has been made in Constitution for compensation to producing States for five years. 
Section 18 of Constitution Amendment  Act effective  from 16-9-2016  provides  that Parliament  shall,  on 
recommendation of GST Council, provide for compensation to States for loss of revenue arising on account of 
implementation of GST for period upto five years [Note that this section is not part of main Constitution. It is a 
stand-alone provision]. 
Goods and Services Tax (Compensation to the States) Act, 2017 [GST Cess Act for short] is to give effect to 
this provision. 
Surcharge on taxes for purpose  of Union  - Article 271 of Constitution of India (amended w.e.f. 16-9- 
Page 2


CA DHRUV AGRAWAL – National Chairman Taxation Committee-All India Confederation of Small & Micro Industries Association  
 
 
 
 
 
 
 
 
 
 
 
 
CHAPTER 40 - GST Compensati on Cess 
 
 
 
 
 
CHAPTER 40 
 
GST Compensation Cess 
 
EXECUTIVE SUMMARY 
 
?   Some  States,  particularly  producing  States  like  Maharashtra,  Gujarat,  Tamil  Nadu,  Punjab, 
Karnataka will lose tax revenue due to abolition of Central Sales Tax. 
?   Such States will be paid compensation by Central Government for five years. 
?   To enable Central Government to pay the compensation, a GST Compensation Cess is proposed to 
be levied on supply of goods or services or both within India and also on import of goods and 
services. 
?   Sections 3 to 7 of GST Cess Act provide for mode of calculating compensation payable to States. 
?   Input Tax Credit of GST Compensation Cess will be available, but the input tax credit in respect of 
GST Compensation Cess can be utilised only towards payment of GST Compensation Cess. 
?   Broadly, maximum GST Cess rates are as follows - (a) Pan Masala - 150% (b) Tobacco and 
tobacco products - Rs 4,170 rupees per thousand sticks or 290% ad valorem or a combination 
thereof (c) Coal, briquettes, ovoids and similar solid fuels manufactured  from coal - Rs 400 per 
tonne (d) Aerated waters - 15% (e)Motor cars and motor vehicles for transport of less than ten 
persons, including drive and also on station wagons and racing cars - 15%. 
?   Actual  rate  of  GST  Compensation  Cess  is  expected  to  be  12%  (where  15%  maximum  is 
applicable). Other goods and a l services are most likely to be exempted from GST compensation 
Cess. 
40.1 Background of GST Compensation Cess 
 
Presently, Central Sales Tax (CST) is co lected by State Government from which goods are supplied. Thus, 
CST is a production based tax. Since GST is a consumption based tax, the State producing goods will not get 
tax revenue out of supply of goods. Thus, a big revenue loss is expected to producing States like Maharashtra, 
Gujarat, Tamil Nadu, Karnataka, Andhra Pradesh, Haryana etc. Consuming States like Bihar, Uttar Pradesh, 
Madhya Pradesh, Chhattisgarh, Kerala, Orissa will be gainers in GST. 
Hence specific provision has been made in Constitution for compensation to producing States for five years. 
Section 18 of Constitution Amendment  Act effective  from 16-9-2016  provides  that Parliament  shall,  on 
recommendation of GST Council, provide for compensation to States for loss of revenue arising on account of 
implementation of GST for period upto five years [Note that this section is not part of main Constitution. It is a 
stand-alone provision]. 
Goods and Services Tax (Compensation to the States) Act, 2017 [GST Cess Act for short] is to give effect to 
this provision. 
Surcharge on taxes for purpose  of Union  - Article 271 of Constitution of India (amended w.e.f. 16-9- 
CA DHRUV AGRAWAL – National Chairman Taxation Committee-All India Confederation of Small & Micro Industries Association  
 
 
2016) provides that Union can levy surcharge on taxes and duties specified in Articles 269 and 270 (i.e. on 
income tax, excise and CST), which will be retained by Union and will not be distributed among States. This 
will not include surcharge on GST. Thus, even if Union imposes surcharge on GST, it will have to be shared 
with States. 
This Article is amended w.e.f. 16-9-2016 to provide that this will not include surcharge on GST. Thus, even if 
Central Government imposes surcharge on GST, it will have to be shared with States. 
 
40.1-1 Compensation to States 
 
To enable Central Government to pay the compensation, a GST Compensation Cess is proposed to be levied 
on supply of goods or services or both within India and also on import of goods and services. 
Sections 3 to 7 of GST Cess Act provide for mode of calculating compensation payable to States. 
 
Section 3 of GST Cess Act states that 14% per annum shall be considered as projected nominal growth of 
revenue of States. This will be calculated at compounded rates as per formula given in section 6 of GST Cess 
Act. 
Section 4 of GST Cess Act states that financial year 2015-16 will be considered as base year. 
Section 5 of GST Cess Act provides for calculation of base year revenue of each State. 
Section 6 of GST Cess Act states that projected revenue for any year in a State will be calculated by applying 
the projected growth rate over the base year revenue of that State. 
Illustration—If the base year revenue for 2015-16 for a concerned State, calculated as per section 5 is one 
hundred rupees, then the projected revenue for financial year 2018-19 shall be as fo lows— 
 
Projected Revenue for 2018-19-100 (1+14/100)
3
 
 
Section 7 of GST Cess Act provides for calculation and release of compensation to States. 
 
40.2 Levy of GST Compensation Cess by Central Government 
 
Section 8(1) of GST Cess Act states that GST Compensation Cess shall be levied on goods or services or 
both as provided in section 9 of CGST Act and section 5 of IGST Act. This cess is to compensate States for 
loss of revenue arising out of implementation of GST. It will be for five years from date of implementation of 
CGST Act. The period can be extended or curtailed by GST Council. 
GST Compensation Cess will be payable on basis similar to CGST Act - section 9 of GST Cess Act. 
 
No cess when GST payable under  composition scheme - No GST Compensation cess shall be leviable 
on supplies made by a taxable person permitted to opt for composition levy under section 10 of the CGST 
Act, 2017 (i.e. composition scheme) - proviso to section 8(1) of GST Cess Act. 
40.3 Input Tax Credit of GST Compensation Cess 
 
Input Tax Credit of GST Compensation Cess will be available - section 11(2) of GST Cess Act. 
 
The input tax credit in respect of GST Compensation Cess on supply of goods and services leviable shall be 
utilised only towards payment of GST Compensation Cess on supply of goods and services leviable under 
section 8 of GST Cess Act - proviso to section 11(3) of GST Cess Act. 
40.4 Supply on which GST Compensation Cess payable 
 
GST Compensation Cess will be payable on supplies listed in Schedule to GST Compensation Act - section 
8(2) of GST Cess 
 
Broadly, maximum GST Cess rates are as follows — 
Page 3


CA DHRUV AGRAWAL – National Chairman Taxation Committee-All India Confederation of Small & Micro Industries Association  
 
 
 
 
 
 
 
 
 
 
 
 
CHAPTER 40 - GST Compensati on Cess 
 
 
 
 
 
CHAPTER 40 
 
GST Compensation Cess 
 
EXECUTIVE SUMMARY 
 
?   Some  States,  particularly  producing  States  like  Maharashtra,  Gujarat,  Tamil  Nadu,  Punjab, 
Karnataka will lose tax revenue due to abolition of Central Sales Tax. 
?   Such States will be paid compensation by Central Government for five years. 
?   To enable Central Government to pay the compensation, a GST Compensation Cess is proposed to 
be levied on supply of goods or services or both within India and also on import of goods and 
services. 
?   Sections 3 to 7 of GST Cess Act provide for mode of calculating compensation payable to States. 
?   Input Tax Credit of GST Compensation Cess will be available, but the input tax credit in respect of 
GST Compensation Cess can be utilised only towards payment of GST Compensation Cess. 
?   Broadly, maximum GST Cess rates are as follows - (a) Pan Masala - 150% (b) Tobacco and 
tobacco products - Rs 4,170 rupees per thousand sticks or 290% ad valorem or a combination 
thereof (c) Coal, briquettes, ovoids and similar solid fuels manufactured  from coal - Rs 400 per 
tonne (d) Aerated waters - 15% (e)Motor cars and motor vehicles for transport of less than ten 
persons, including drive and also on station wagons and racing cars - 15%. 
?   Actual  rate  of  GST  Compensation  Cess  is  expected  to  be  12%  (where  15%  maximum  is 
applicable). Other goods and a l services are most likely to be exempted from GST compensation 
Cess. 
40.1 Background of GST Compensation Cess 
 
Presently, Central Sales Tax (CST) is co lected by State Government from which goods are supplied. Thus, 
CST is a production based tax. Since GST is a consumption based tax, the State producing goods will not get 
tax revenue out of supply of goods. Thus, a big revenue loss is expected to producing States like Maharashtra, 
Gujarat, Tamil Nadu, Karnataka, Andhra Pradesh, Haryana etc. Consuming States like Bihar, Uttar Pradesh, 
Madhya Pradesh, Chhattisgarh, Kerala, Orissa will be gainers in GST. 
Hence specific provision has been made in Constitution for compensation to producing States for five years. 
Section 18 of Constitution Amendment  Act effective  from 16-9-2016  provides  that Parliament  shall,  on 
recommendation of GST Council, provide for compensation to States for loss of revenue arising on account of 
implementation of GST for period upto five years [Note that this section is not part of main Constitution. It is a 
stand-alone provision]. 
Goods and Services Tax (Compensation to the States) Act, 2017 [GST Cess Act for short] is to give effect to 
this provision. 
Surcharge on taxes for purpose  of Union  - Article 271 of Constitution of India (amended w.e.f. 16-9- 
CA DHRUV AGRAWAL – National Chairman Taxation Committee-All India Confederation of Small & Micro Industries Association  
 
 
2016) provides that Union can levy surcharge on taxes and duties specified in Articles 269 and 270 (i.e. on 
income tax, excise and CST), which will be retained by Union and will not be distributed among States. This 
will not include surcharge on GST. Thus, even if Union imposes surcharge on GST, it will have to be shared 
with States. 
This Article is amended w.e.f. 16-9-2016 to provide that this will not include surcharge on GST. Thus, even if 
Central Government imposes surcharge on GST, it will have to be shared with States. 
 
40.1-1 Compensation to States 
 
To enable Central Government to pay the compensation, a GST Compensation Cess is proposed to be levied 
on supply of goods or services or both within India and also on import of goods and services. 
Sections 3 to 7 of GST Cess Act provide for mode of calculating compensation payable to States. 
 
Section 3 of GST Cess Act states that 14% per annum shall be considered as projected nominal growth of 
revenue of States. This will be calculated at compounded rates as per formula given in section 6 of GST Cess 
Act. 
Section 4 of GST Cess Act states that financial year 2015-16 will be considered as base year. 
Section 5 of GST Cess Act provides for calculation of base year revenue of each State. 
Section 6 of GST Cess Act states that projected revenue for any year in a State will be calculated by applying 
the projected growth rate over the base year revenue of that State. 
Illustration—If the base year revenue for 2015-16 for a concerned State, calculated as per section 5 is one 
hundred rupees, then the projected revenue for financial year 2018-19 shall be as fo lows— 
 
Projected Revenue for 2018-19-100 (1+14/100)
3
 
 
Section 7 of GST Cess Act provides for calculation and release of compensation to States. 
 
40.2 Levy of GST Compensation Cess by Central Government 
 
Section 8(1) of GST Cess Act states that GST Compensation Cess shall be levied on goods or services or 
both as provided in section 9 of CGST Act and section 5 of IGST Act. This cess is to compensate States for 
loss of revenue arising out of implementation of GST. It will be for five years from date of implementation of 
CGST Act. The period can be extended or curtailed by GST Council. 
GST Compensation Cess will be payable on basis similar to CGST Act - section 9 of GST Cess Act. 
 
No cess when GST payable under  composition scheme - No GST Compensation cess shall be leviable 
on supplies made by a taxable person permitted to opt for composition levy under section 10 of the CGST 
Act, 2017 (i.e. composition scheme) - proviso to section 8(1) of GST Cess Act. 
40.3 Input Tax Credit of GST Compensation Cess 
 
Input Tax Credit of GST Compensation Cess will be available - section 11(2) of GST Cess Act. 
 
The input tax credit in respect of GST Compensation Cess on supply of goods and services leviable shall be 
utilised only towards payment of GST Compensation Cess on supply of goods and services leviable under 
section 8 of GST Cess Act - proviso to section 11(3) of GST Cess Act. 
40.4 Supply on which GST Compensation Cess payable 
 
GST Compensation Cess will be payable on supplies listed in Schedule to GST Compensation Act - section 
8(2) of GST Cess 
 
Broadly, maximum GST Cess rates are as follows — 
CA DHRUV AGRAWAL – National Chairman Taxation Committee-All India Confederation of Small & Micro Industries Association  
 
 
Pan Masala - 150% 
 
Tobacco  and  tobacco  products  -  Rs  4,170  rupees  per thousand  sticks  or 290%  ad  valorem or a 
combination thereof 
 
Coal, briquettes, ovoids and similar solid fuels manufactured from coal - Rs 400 per tonne 
 
Aerated waters - 15% 
 
Motor cars and motor vehicles for transport of less than ten persons, including drive and also on station 
wagons and racing cars - 15% 
 
A l Other supplies - 15% 
 
Other supplies may be exempt by notification  - Though the schedule to GST (CSLR) Act imposes 15% 
GST on 'A l Other Supplies', this is only an enabling provision. Mostly and hopefu ly, there will be no GST 
Compensation on supplies other than SIN goods or l uxury goods. 
40.5 Other provisions relating to GST Compensation Cess 
 
Taxable person will have to pay tax and f ile returns. 
 
A l provisions relating to f iling returns under IGST Act will apply in case of GST Compensation Cess - section 
9 of GST (CSLR) Act. 
 
A l provisions of CSGT Act and IGST Act will apply to GST Compensation Cess - section 11(1) and 11(2) 
of GST (CSLR) Act. 
 
40.5-1 Crediting proceeds of GST Compensation Cess 
 
The proceeds of the GST Compensation Cess leviable under section 8 shall be credited to a non-lapsable 
fund known as the GST Compensation Fund in the Public Account, and shall be utilized for purposes specified 
in section 8 of GST Compensation Cess - section 10(1) of GST Cess Act. 
A l amounts payable to the States under section 7 of GST Cess Act shall be paid from the Goods and Tax 
Compensation Fund. 
 
50% of the amount remaining unutilized in the GST Compensation Fund at the end of the transition period shall 
be transferred to the Consolidated Fund of India as share of Centre and balance 50% shall be distributed 
amongst the States on the basis of total revenue from SGST and UTGST in the last year of transition period -- 
section 10(3) of GST Cess Act. 
Accounts of Fund shall be audited by C&AG or any person appointed by C&AG. The Audited Accounts will 
be placed before Parliament -- section 10(5) of GST Cess Act. 
40.5-2 Miscellaneous provisions 
 
Section 12 of GST Cess Act provides for powers of Central Government to make rules. Section 13 provides 
that these rules will be placed before Parliament. 
Section  14  of GST Cess  Act  makes  provisions  for  removal of di fficulties  by issuing  order  by Central 
Government on recommendation of GST Council.