Goods and Services Tax (Compensation to States) Act, 2017 was enacted to levy Compensation Cess for providing compensation to the States for the loss of revenue arising on account of implementation of the goods and services tax with effect from the date from which the provisions of the Central Goods and Services Tax Act is brought into force (01/07/2017), for a period of five years or for such period as may be prescribed on the recommendations of the GST Council.
The Compensation Cess on goods imported into India shall be levied and collected in accordance with the provisions of section 3 of the Customs Tariff Act, 1975, at the point when duties of customs are levied on the said goods under section 12 of the Customs Act, 1962, on a value determined under the Customs Tariff Act, 1975.
Compensation Cess will not be charged on goods exported by an exporter under bond/LUT and the exporter will be eligible for refund of input tax credit of Compensation Cess relating to goods exported. In case goods have been exported on the payment of Compensation Cess the exporter will be eligible for refund of Compensation Cess paid on goods exported by him.
Compensation Cess shall not be leviable on supplies made by a taxable person who has decided to opt for composition levy.
Input Tax Credit
The input tax credit in respect of Compensation Cess on supply of goods or services can be utilised only towards payment of the Compensation Cess on supply of goods or services or both.
Valuation if Cess to be levied on value
In case the Compensation Cess is chargeable on any supply of goods or services or both with reference to their value, then for each such supply, the value has to be determined under section 15 of the Central Goods and Services Tax Act, 2017.
Laws and Rules applicable
The provisions of the Central Goods and Services Tax Act, 2017 and the rules made there under, including those relating to assessment, input tax credit, non-levy, short-levy, interest, appeals, offences and penalties, shall apply in relation to the levy and collection of the Cess on the intra-State supply of goods and services. Similarly, in case of inter-State supplies the provisions of the Integrated Goods and Services Tax Act, and the rules made there under will apply.
Conclusion
The Compensation Cess is a Cess that will be collected on the supply of select goods and or services or both till 1st July 2022. The Cess will compensate the states for any revenue loss on account of implementation of GST. This Cess will not be payable by those persons who have opted for compensation levy. The input tax credit of this Cess can be only used to pay Compensation Cess and not the other taxes like CGST, SGST, UTGST or IGST.