Compensation Cess under GST

Compensation Cess Under GST

The Goods and Services Tax (GST) Act, 2017 provides for a mechanism to compensate the states for the revenue loss on account of the rollout of GST. Such compensation is to be provided by the Centre to the States. An Act namely the Goods and Services Tax (Compensation to States) Act, 2017 has been enacted to seamlessly payout such compensation to states.

Salient features of the Compensation Cess Act, 2017

The salient features of the Compensation Cess Act, 2017 (the Act) are the following:

• Compensation cess would be paid for a period of five years.
• The base year during the transition period is financial year 2015–16 which is being used for the purpose of computing compensation cess payable to states.
• The revenue to be compensated is determined basis the revenue of states arising from taxes subsumed under GST. The accounts were audited by the CAG for determining the same.
• The growth rate of revenue subsumed under GST was determined at 14% per annum.
• It was decided that the Compensation cess will be released bi-monthly on the basis of the provisional numbers furnished by the Central Accounting Authorities and the final adjustment to be done after the accounts are subjected to audit by CAG.
• For 11 special category states, it was decided that the revenue foregone on account of exemption would also be considered for the purpose of determining the revenue for the base year i.e., 2015–16.
• The revenue of the states which directly transfer to mandi/ municipalities was considered as revenue subsumed.
• A cess would be notified on specified goods for a period of 5 years, the revenue of which will be used to compensate states for loss of revenue.
• 50% of the amount which remains unutilized in the fund at the end of the fifth year would be transferred to the Centre and the balance 50% would be distributed amongst the States and Union Territories in the ratio of total revenues from SGST/ UTGST of the fifth year.
• The provision of the GST law and the rules made thereunder including the provisions relating to assessments, input tax credit, non-levy, short-levy, interest, appeals, offences, and penalties, would also apply to the Compensation cess so levied.
• The input tax credit of Compensation cess shall be utilised only towards payment of said Cess on supply of goods and services leviable under the said Section.
• Compensation cess would not be leviable on supplies made by a person who has opted for composition levy.
• The Cess is to be levied on taxable value and would be payable over and above the CGST, SGST, IGST. Taxable value means transaction value exclusive of GST leviable.
• An exporter is permitted to avail credit of cess paid on export of goods similar to IGST paid on exports. Similarly, Cess is not charged if goods are exported under LUT. Read the full blog on Cygnet GSP.