India Extends GST Compensation Cess Levy till March 2026

Posted by Written by Naina Bhardwaj Reading Time: 3 minutes

To repay the liquidity support given to state governments during the Covid-19 period, India’s federal government has extended the timeline for GST compensation cess levy by four years until March 31, 2026. The move will impact sectors like automotive and tobacco through higher tax rates. The cess is levied on notified luxury goods falling in the 28 percent GST slab. While it will be levied on imported goods, exporters will be eligible to claim input tax credit refund relating to goods exported.

India’s federal government recently notified the extension of the Goods and Services Tax (GST) compensation cess, which is levied on notified luxury goods and demerit goods in the 28 percent slab. As per the recently issued GST (Period of Levy and Collection of Cess) Rules, 2022, the compensation cess, whose levy was slated to end on June 30, 2022, will now continue to be imposed for another four years until March 31, 2026.

The move was recommended by the GST Council as a way to recompense for the liquidity support given to the Indian states during the Covid-19 period, when tax collection was not sufficient to compensate for GST revenue losses. This extension will continue to impose a burden on the impacted businesses, such as tobacco and cars, through increased tax rates.

What is the GST compensation cess?

With operationalization of GST in India in 2017, the federal government assured the states that they will be compensated for revenue shortfall resulting from subsuming their taxes, such as value added tax (VAT), into the GST, for a period of five years, that is till July 1, 2022. Accordingly, the GST (Compensation to States) Act, 2017 was enacted to impose the compensation cess.

The compensation cess is applicable on specific goods, including tobacco, cigarettes, hookah, aerated water, high-end motorcycles, aircraft, yachts, and motor cars.

Why is the timeline for levy of GST compensation cess extended?

The government decided to prolong the levy of the GST compensation cess till March 2026 for repayment of the loans that were obtained in the previous two fiscal years. To meet the resource gap of states due to short release of compensation, the federal government had borrowed and released consecutive loans worth INR 1.1 trillion in FY 2021 and INR 1.59 trillion in FY 2022 to meet a part of the shortfall in cess collection.

While it has repaid INR 75 billion as interest cost for the borrowing in FY 2022, INR 140 billion is to be paid in FY 2023. Further, the repayment of the principal amount will start from FY 2024 and will continue till March 2026.

Who is liable to collect GST compensation cess?

All taxable persons selling the notified goods will be liable to collect and remit the GST compensation cess. GST compensation tax payers have been exempted from it.

The compensation cess on goods imported into India shall be levied and collected in accordance with the provisions of section 3 of the Customs Tariff Act, 1975.

At the same time, it will not be charged on goods exported by an exporter under bond.

Can input tax credit (ITC) on compensation cess be availed?

ITC can be availed on GST compensation cess paid on inward supplies. It means that the exporter will be eligible for refund of ITC of the cess relating to goods exported.

However, credit of cess paid can be utilized only towards payment of the compensation cess on supply of goods or services.

How is the GST compensation cess calculated?

The cess is calculated on the transaction value, that is, the price at which the goods are sold. It should be levied in addition to the GST taxes (CGST + SGST) in case of intrastate supplies and IGST in case of interstate supplies.

How is industry responding to the extension of cess?

Industry stakeholders are unhappy with the extension but had anticipated the move by the government. Businesses remain concerned about the increased taxes slowing down macroeconomic variables.

According to M S Mani (Partner, Deloitte India), “The extension of the levy of compensation cess, although expected, will continue to impose a burden on the impacted businesses, especially sectors like automotive, which need to be encouraged as it is one of the sectors that has a multiplier effect on GDP and employment.”

What items are set to lose their GST exemption status?

Items that could soon lose their GST exemption status include packaged curd (yogurt), lassi, buttermilk, foodgrains, cereals, honey, papad, and several non-branded food items. Hotel rooms that charge a tariff lower than INR 1000 per night and hospital rooms that charge a tariff of above INR 5000 per day will also become taxable under GST. These recommendations were submitted by state finance ministers and accepted by the GST Council on Tuesday, June 28, 2022. The date for implementation of these recommendations have not yet been decided. Further discussions on which items of daily use should retain their GST exemption status will continue on Wednesday, June 29, the second day of the two-day GST Council meeting.

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