The Goods and Services Tax (GST), which went into effect in India on July 1, 2017, is a comprehensive indirect tax that applies to the whole nation. GST is levied at the point of supply and is based on the location of consumption.
For example, if a product is manufactured in state A but absorbed in state B, the income earned by GST collection is attributed to the state of consumption (state B) rather than the place of production (state A). As a result, manufacturing states, including Haryana, Gujarat, Maharashtra, Karnataka and Tamil Nadu, were concerned about revenue loss due to the consumption-based structure of GST.
As a result, the government enacted the GST Cess or GST Compensation Cess to compensate for potential income losses faced by such manufacturing states. However, under current laws, this compensatory cess will only be collected for the first five years of the GST system.
Except for those who export specified declared items and those who have chosen the GST composition plan, all taxpayers are required to collect and send the GST compensation cess to the federal government. The union government then distributes money to the appropriate states.
GST Cess is determined by the registered products' pre-GST price. The compensatory Cess on coal, for example, is ₹400 per tonne. If you sell a tonne of coal for ₹5,000, you must pay a GST Cess of ₹400. Furthermore, GST at the rate of 5% will be charged on the same. As a result, the total GST obligation for coal delivery would be ₹750. When the compensating cess was phased out on July 1, 2022, the overall GST burden was lowered to ₹250.
According to the GST Act of 2017, a GST Compensation Cess is levied on certain listed products. In addition to standard GST, a compensation cess is levied. GST Cess is also levied on imported products under Section 3 of the Customs Tariff Act of 1975.
The union government distributes the GST Compensation Cess collected to manufacturing-heavy states to compensate for potential income losses owing to the introduction of the consumption-based GST system.
If you are a producer, an input tax credit may assist you in decreasing your GST due by just paying the difference between the tax previously paid on raw materials and the tax on the finished product. To put it another way, the taxes paid on purchases (input tax) may be deducted from the taxes paid on finished goods (output tax) to minimise the ultimate GST burden.
Assume you are a manufacturer, and the GST due on the end product is ₹500. However, if you previously paid ₹300 for raw materials, you may claim ₹300 as an input tax credit and pay the remaining ₹200 as GST at the time of delivery.
Similarly, input tax credit may be claimed on GST Cess paid while purchasing specified items. Notably, the input tax credit claimed in this situation may only be used to pay the GST Cess and not the SGST, CGST or IGST.