GST Compensation Cess is levied by the Goods and Services Tax (Compensation to States) Act 2017. The object of levying this cess is to compensate the states for the loss of revenue arising due to the implementation of GST on 1st July 2017 for a period of five years or such period as recommended by the GST Council.
GST is considered one of the largest and most complex taxes in India. It is a comprehensive, multistage, destination-based tax: comprehensive because it has subsumed almost all the indirect taxes except a few state taxes.
A cess is an earmarked tax that is collected for a specific purpose and ought to be spent only for that.
Cess may initially go to the CFI but has to be used for the purpose for which it was collected.
Cess collections are supposed to be transferred to specified Reserve Funds that Parliament has approved for each of these levies.
Every cess is collected after Parliament has authorised its creation through an enabling legislation that specifies the purpose for which the funds are being raised.
Article 270 of the Constitution allows cess to be excluded from the purview of the divisible pool of taxes that the Union government must share with the States.
The Goods and Services Tax in India is a comprehensive, multi-stage, destination-based value-added indirect tax. It has replaced many central and state indirect taxes in India such as the excise duty, VAT, services tax, etc.
GST compensation: As per the GST (Compensation to States) Act, 2017, states are guaranteed compensation for revenue loss on account of implementation of GST for a transition period of five years (2017-2022).
The compensation is calculated based on the difference between the current states’ GST revenue and the protected revenue after estimating an annualised 14% growth rate from the base year of 2015-16.
Any shortfall has to be compensated from the receipts of Compensation Cess imposed on selected commodities that attract a GST of 28 per cent.
At present, the cess levied on sin and luxury goods such as tobacco and automobiles flow into the compensation fund.
But the issue was created when during Pandemic govt. denied paying compensation cess due to low revenue collection.