Compensation Cess

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GST Compensation Cesses

Definition of Compensation Cess:

The compensation cess is a tax imposed in addition to the Goods and Services Tax. The compensation cess is a tax that will be collected until July 1, 2022, on the supply of particular goods and/or services or both. The cess will compensate the states for any lost revenue due to the implementation of the GST. This cess is not payable by exporters and individuals who have elected to pay the compensation levy. This cess’ input tax credit may only be used to pay compensation cess and not other taxes such as CGST, SGCT, or IGST.

The Compensation Cess will not be charged on goods exported by a bond-eligible exporter, and the exporter will be eligible for a refund of the Compensation Cess input tax credit related to the exported goods. If goods were exported after payment of Compensation Cess, the exporter is eligible for a refund of the Compensation Cess paid on those goods. The compensation cess is not applicable to supplies made by a taxpayer who has elected a composition levy.

When customs duties are assessed on goods under section 12 of the Customs Act, 1962, the compensating cess on those items must be assessed and collected in line with section 3 of the Customs Tariff Act, 1975, based on a value established by the Customs Tariff Act.

Input Tax Credit:

The input tax credit relating to the compensation cess on the supply of goods or services may only be used to pay the compensation cess on the supply of goods or services.

Statutes and regulations applicable:

The levying and collection of the cess on intra-State supply of goods and services shall be subject to the provisions of the Central Goods and Services Tax Act, 2017, and the rules made thereunder, including those relating to assessment, input tax credit, non-levy, short-levy, interest, appeals, offences, and penalties. In a similar vein, interstate sales will be subject to the provisions of the Integrated Goods and Services Tax Act and its implementing rules.

The debit note or supplementary invoice is therefore a practical and permissible thanks to increase the value of the goods or services listed on the original tax invoice. The issuance of the debit note will facilitate the supplier’s payment of his increased liabilities in his tax returns without requiring him to interact in any additional laborious procedures.

Valuation of Cess:

If the compensation cess is leviable on any supply of goods or services or both based on their value, then the value of each such supply must be determined in accordance with section 15 of the Central Goods and Services Tax Act, 2017.

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