What is Compensation Cess (under GST)?
Historical Background
Key Points
8 points- 1.
Levy: Levied on intra-state and inter-state supply of specified goods and services, and on imports.
- 2.
Specified Goods: Includes pan masala, tobacco and tobacco products (like cigarettes), aerated drinks, motor vehicles, and coal.
- 3.
Calculation: Can be levied as an ad valorem rate (percentage of value), a specific rate (per unit), or a combination of both.
- 4.
Fund Utilization: The collected cess is credited to a non-lapsable GST Compensation Fund, which is then used to compensate states.
- 5.
Duration: Initially guaranteed for five years (till June 30, 2022). However, due to significant borrowings during the COVID-19 pandemic to meet compensation shortfalls, the levy period has been extended for some items to repay these loans.
- 6.
Over and above GST: It is levied in addition to the regular CGST, SGST/UTGST, or IGST rates.
- 7.
No Input Tax Credit: Generally, Input Tax Credit (ITC) cannot be claimed for the compensation cess paid by the recipient.
- 8.
Revenue Loss to States: Aims to offset the revenue loss to states from the implementation of GST, ensuring fiscal stability for states.
Visual Insights
GST Compensation Cess: Purpose, Mechanism & Impact
A mind map detailing the primary purpose, legal framework, levy mechanism, and key features of the GST Compensation Cess, highlighting its role in fiscal federalism.
GST Compensation Cess
- ●Primary Purpose
- ●Legal Framework
- ●Levy Mechanism
- ●Key Features
- ●Duration & Extension
GST Compensation Cess: Journey and Extensions (2016-2026)
This timeline highlights the key events in the lifecycle of the GST Compensation Cess, from its constitutional backing to its implementation, initial expiry, and subsequent extensions due to fiscal challenges.
The Compensation Cess, initially a temporary measure, evolved due to unforeseen economic crises, showcasing the dynamic nature of fiscal policy and Centre-State financial relations under GST.
- 2016Constitution (101st Amendment) Act guarantees compensation to states for 5 years.
- July 1, 2017GST and Compensation Cess implemented.
- 2020-21COVID-19 pandemic leads to significant revenue shortfall; Centre borrows to meet compensation needs.
- June 30, 2022Initial 5-year period for GST compensation ends.
- July 2022GST Council extends the levy of compensation cess on certain items to repay borrowings from 2020-21 and 2021-22.
- 2023-2025Continued collection of cess for loan repayment; discussions on future of state compensation.
- Jan 2026Cess hike on cigarettes by GST Council (current news, part of ongoing cess mechanism).
Recent Developments
4 developmentsExtension of the compensation cess levy period beyond June 2022 for certain goods to repay the loans taken to meet compensation shortfalls during 2020-21 and 2021-22.
Debates on the future of compensation to states post-2022, with many states demanding continued support.
Increase in cess rates on specific items, as seen in the news, to boost revenue.
Discussions on whether the cess mechanism should be continued for specific purposes even after loan repayment.