What is GST Compensation Cess?

By Sakshi Shah on February 28, 2019

GST Compensation Cess is the cess levied on certain notified goods. It is charged in addition to IGST, CGST and SGST. Further, the provisions for charging GST compensation cess have been listed in the Goods and Services Tax (Compensation to States) Act, 2017.

The purpose of levying GST Compensation Cess is to compensate the states that incurred a loss in revenues due to the implementation of the GST Act. Since GST is a consumption-based tax, the state in which the goods or services are consumed would be eligible for the revenue from GST. Thus, the manufacturing states i.e. Gujarat, Haryana, Karnataka, Maharashtra and Tamil Nadu would lose their revenue. As a result, GST Compensation Cess was introduced to distribute its revenue amongst the manufacturing states.

  • It would be levied for a period of five years (up to 01/07/2022) from the date of implementation of GST i.e. 01/07/2017. This time period can be extended based on the recommendations of the GST Council
  • Taxable persons selling notified goods are liable to collect and pay GST compensation cess. The list of notified goods and services can be viewed here
  • It is calculated on the transaction value of goods or services
  • The input tax credit of cess can only be used for payment of cess liability on sales. It cannot be used for payment of output CGST, SGST or IGST
  • It would not be chargeable on goods exported out of India. The exporter can claim a refund of the input tax credit of GST compensation cess paid on purchases
  • It would not be chargeable to dealers who are registered under the Composition Scheme