GST Cess Explained: A Comprehensive Overview

Introduced in July 2017, GST replaced a myriad of central and state taxes.

In the complex landscape of taxation in India, the goods and services tax (GST) stands out as a significant reform aimed at simplifying the indirect tax structure. Introduced in July 2017, GST replaced a myriad of central and state taxes, aiming to create a unified market across the country. Within this framework, there exists a mechanism known as GST cess.

Moneycontrol examines the need and impact of GST cess.

What is GST cess?

The cess is an additional levy imposed on certain goods and services over and above standard GST. Unlike GST, which is collected to fund the operations of both central and state governments, revenue generated from GST cess is earmarked for a specific purpose: to compensate states for revenue loss incurred due to the implementation of GST or to fund specific projects or sectors.

Purpose of GST cess

The GST regime, aimed to create a single market by subsuming various taxes, led to the elimination of certain revenue streams for states. To mitigate this loss, the GST Compensation Cess was introduced for a transitional period of five years to ensure that states do not suffer financially. The cess fund was used to ensure states received a guaranteed 14 percent growth in their tax revenue under the new indirect tax regime till June 30, 2022.

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However, during the COVID-19 pandemic years, GST collections nosedived as did the cess fund collection. The central government borrowed Rs 1.1 lakh crore in FY21 and Rs 1.59 lakh crore in FY22 to ensure that the states were compensated as per the guaranteed 14 percent growth in their tax revenue.

While the states were compensated only for the five-year protected revenue period till June 2022, it was decided that GST cess would stay in place until March 31, 2026, to help pay back the aforementioned back-to-back loans.

What happens starting April 2026, when the cess ceases to exist, is a decision that the government has to make.

Implementation of GST cess

The implementation of GST cess involves identifying goods and services that are subject to this additional levy. The GST Council, a constitutional body responsible for making decisions related to GST, determines the goods and services that attract cess and the applicable cess rate.

The cess is typically levied on demerit or luxury goods such as tobacco products, aerated drinks, automobiles, and certain luxury items.

Impact of GST cess

The imposition of GST cess has had implications for various stakeholders. Consumers may pay higher prices for goods and services subject to GST cess as businesses often pass on the burden of cess to them.

For businesses producing or selling goods and services subject to GST cess, compliance requirements become more complex. They must accurately calculate and collect cess in addition to regular GST, ensuring adherence to regulatory guidelines.