In the intricate realm of taxation in India, the Goods and Services Tax (GST) emerges as a noteworthy initiative aimed at streamlining the indirect tax system. Launched in July 2017, GST took the place of various central and state taxes, with the objective of establishing a cohesive market nationwide. Within this structure, there is a component referred to as GST cess.
What is GST Cess?
GST cess is an extra charge imposed on specific goods and services in addition to the standard Goods and Services Tax. Unlike the GST, which contributes to the operational funding of both central and state governments, the revenue generated from GST cess is allocated for a distinct purpose. It is either utilized to compensate states for the revenue reduction resulting from GST implementation or directed towards funding specific projects or sectors.
Why GST Cess?
The introduction of the GST regime, aimed at consolidating various taxes to create a unified market, resulted in the loss of certain revenue streams for states. To address this financial setback, the GST Compensation Cess was implemented for a transitional period of five years, ensuring states did not face economic challenges. The funds from the cess were utilized to guarantee states a consistent 14 percent growth in their tax revenue under the new indirect tax system until June 30, 2022.
However, amid the COVID-19 pandemic, GST collections, along with cess fund collections, experienced a significant decline. To fulfill the compensation commitment, the central government borrowed Rs 1.1 lakh crore in FY21 and Rs 1.59 lakh crore in FY22.
Although states were compensated only until the protected revenue period ending June 2022, it was decided to extend the existence of the GST cess until March 31, 2026, to facilitate the repayment of the borrowed amounts. The future beyond April 2026, when the cess is set to expire, is a decision that the government will need to make.
Execution of GST Cess
The execution of GST cess encompasses the identification of goods and services that are subjected to this supplementary charge. The GST Council, a constitutional body tasked with making decisions concerning GST, is responsible for specifying the goods and services subject to cess and determining the corresponding cess rates.
Generally, cess is imposed on goods and services categorized as demerit or luxury items, which commonly include tobacco products, aerated drinks, automobiles, and certain luxury goods.
Impact of GST Cess
The introduction of GST cess has brought about consequences for different parties involved. Consumers may experience increased costs for goods and services that are subject to GST cess, as businesses frequently transfer the cess burden to them.
Businesses engaged in the production or sale of goods and services subjected to GST cess face heightened complexity in compliance requirements. They must meticulously compute and collect cess in addition to the standard GST, ensuring strict adherence to regulatory directives.
GST Compensation Cess
To address concerns about potential revenue loss among manufacturing states like Gujarat, Haryana, Karnataka, Maharashtra, and Tamil Nadu due to the consumption-based nature of the GST, the government introduced the GST Compensation Cess, also known as GST Cess. Enacted under the GST (Compensation to States) Act of 2017, this compensation cess is applied to five goods categorized as “sin” or “luxury,” such as Pan Masala, Tobacco, and Automobiles.
The establishment of the compensation cess fund was a proactive measure to mitigate any revenue shortfalls experienced by manufacturing states. The decision was made to utilize the additional cess imposed on specific commodities to fund the compensation for states facing such losses.
Regarding exported goods, the compensation cess will not be imposed on goods exported under bond/LUT (Letter of Undertaking), and exporters are eligible for a refund of the input tax credit related to the Compensation Cess on exported goods. If goods have been exported with the payment of Compensation Cess, the exporter is entitled to a refund of the Compensation Cess paid on those exported goods.
How is GST compensation cess calculated?
As for the calculation of GST compensation cess, it is computed based on the price of the specified goods before the application of GST. The compensation cess is applied in addition to the GST amount charged for a particular supply.
Conclusion
In the intricate web of India’s tax system, GST cess and compensation mechanisms play crucial roles. Beyond addressing revenue losses and funding specific projects, these components impact consumers and businesses alike. As the government contemplates the future of GST cess post-April 2026, a delicate balance must be struck to sustain financial stability and foster a unified market. The evolving landscape calls for prudent decisions to ensure the continued effectiveness of these pivotal elements in the nation’s taxation framework.
