Understanding Cess in GST with Examples

Home » Blogs » Understanding Cess in GST with Examples

Table of Contents

Introduction to GST Cess

One major contributor to India’s indirect tax system’s simplification is the goods and services tax or GST. The GST was implemented in July 2017 to establish a single national market and replace many federal and state levies. Within this more extensive umbrella of GST is another framework known as GST cess.

This GST cess is an additional tax imposed on specific goods and services beyond the GST rate. The money raised from the GST cess is designated for a particular use, either to make up for states’ revenue losses brought on by introducing the GST or to finance specific projects or industries. This is in contrast to the GST, which is collected to support the operations of both the federal and state governments.

Type of Cess in GST

The different types of cess which are present in India are mentioned below:

  • GST compensation cess
  • Cess on exports
  • National calamity contingent duty on tobacco and tobacco products
  • Cess on crude oil
  • Building and other construction workers’ welfare cess
  • Health and education cess
  • Road and infrastructure cess

The health cess was introduced in 2020-21 by Finance Minister Nirmala Sitharaman in the finance bill. It has a 5% cess on imported medical devices.

Legal Framework for Cess in GST

Leveraging and collecting GST cess is governed by Section 8 of the GSTC Act. Using the authority granted by Section 8(2) of the Act above, the Central Government announces the cess rate to be applied to commodities supplied within or between states.

On the other hand, notification No. 1/2017-CC(R) dated June 28, 2017, provided a residual entry in Sl. No. 55, prescribing a Nil rate for all items other than those included in the Table, even though it prescribes the rate of cess leviable in respect of a restricted number of suppliers of goods in a tabular format.

Similarly, notification No. 2/2017-CC(R), dated June 28, 2017, specifies the cess leviable rate for just three service suppliers. It also includes a residual entry in SI No. 3 specifying a Nil rate for additional services.

Laws and Applicable Cess Rules

The Central Goods and Services Tax Act of 2017’s provisions will control the charge and collection of the cess on intrastate supplies of goods and services. Therefore, the rules included assessment, input tax credit, non-levy, short-levy, interest, appeals, offenses, and penalties.

Likewise, the Integrated Goods and Services Tax Act’s provisions and implementing regulations shall apply to interstate shipments.

Cess Calculation Methodologies

While knowing and understanding cess is essential, learning the GST cess calculation methods can help better comprehend it. Any goods or services that attract GST cess must be calculated based on the supply’s taxable value and by the provided GST cess rate schedule.

Similarly, if the GST cess applies to goods imported to India, they will be levied and collected with customs duty and IGST. Let’s see an example for this one.

Let us assume the assessed imported value of goods to India is INR 100, GST is 18%, and customs duty is 10%. The IGST tax will be calculated as below:

Assessable value = 100

Customs duty = 10% of 100 = 10

Value for the levying IGST = 110

GST – integrated tax = 18% of 110 = 19.80

Total tax = INR 29.80

If this good also attracts GST cess, then the cess will apply to INR 110, as the compensation cess is not levied on IGST.

Impact of Cess on Businesses

Taxes always affect ordinary people, and cess is no exception. There is an impact of GST cess on businesses and other stakeholders. Because of the implementation of cess, consumers would eventually face the most burden. They will be asked to pay a higher amount for goods and services falling under the GST cess as businesses will try to put this burden on them.

On the other hand, it will also be a challenging journey for businesses. They will have to deal with complex compliance requirements for their goods and services that will attract GST cess. They must carefully calculate and collect cess along with GST while adhering to regulatory guidelines.

Examples of Cess Implementation

Let us look at a cess implementation example to help you better understand. Health and education is one cess levied on all taxpayers as a direct tax. At present, the health and education cess is 4%. Considering this, let’s assume that A is earning a specific income subject to taxation at their highest tax slab of 30%.

Hence, their effective income tax will be 31.2% {30%+(4% of 30% personal income tax rate)}. Now, if the income of A is INR 10 lakh, the total taxable income will be INR 3,12,000, assuming there are no deductions.

Recent Changes and Updates in Cess

There are some recent changes in GST cess rates, and it is expected that this GST compensation may end on certain products sooner than March 2026 due to substantial GST collections. These products are liquor, automobiles, aerated water, cigarettes, and coal.

In the five-year transition period ending in June 2022, states have already received the entire provisionally admissible compensation of INR 9.14 lakh crore for their revenue shortfalls. However, the cess has been extended to retire the INR 2.69 lakh crore loan taken out for this purpose during the COVID-19 pandemic.

Since the GST collections are robust, the government can repay the debt before the March 2026 deadline. If the GST compensation cess is removed, the products will be cheaper and easier to purchase and use.

Compliance and Reporting Requirements for Cess

Compliance with any tax, direct or indirect, is significant. There are specific compliance requirements for GST cess that taxpayers must abide by. Cess is an additional burden on the taxpayers and increases the reporting requirements. The taxpayers must maintain separate records, file, and pay separate dues for their cess.

This compliance is one of the challenges with GST cess implementation, especially for people who have to manage and maintain multiple cess records. Multiple cesses include road and infrastructure, health and education, coal, etc.

The compliance part also impacts the tax authorities. It increases their workload and is an additional item to take care of. They are required to monitor and handle the cess transfers and collections adequately.

GST Compensation Cess Rates – Goods

Goods Cess
Pan masala 60%
Motor vehicles of 1500cc and above engine capacity, known as SUVs, including utility vehicles 22%
Unmanufactured tobacco with lime tube featuring a brand 65%
Motor vehicles with less than 1500cc engine capacity 17%
Unmanufactured tobacco without lime tube featuring a brand 71%
Diesel-driven motor vehicles with engine capacity not exceeding 1500cc and of length not exceeding 4000 mm 3%
Branded tobacco refuse 61%
LPG, petrol, or CNG-driven motor vehicles with engine capacity not exceeding 1200cc and length not exceeding 4000 mm 1%
Cigar and cheroots 21% or INR 4170 per thousand, whichever is higher
Motor cars and other motor vehicles (including racing cars and station wagons) designed for the transport of persons (excluding motor vehicles for the transport of 10 or more persons, including the driver)  15%
Cigarillos 21% or INR 4170 per thousand, whichever is higher
Aerated water 12%
Cigarettes with tobacco, excluding filter cigarettes, of length not more than 65 mm 5% + INR 2076 per thousand
Coal, briquettes, ovoids, and similar solid fuels manufactured from coal, lignite, whether or not agglomerated, excluding jet, peat (including peat litter), whether or not agglomerated INR 400 per tonne
Cigarettes with tobacco, apart from filter cigarettes, of length more than 65 mm and up to 75 mm 5% + INR 3668 per thousand
All goods, excluding pan masala containing tobacco ‘gutkha’, not bearing a brand name 89%
Branded gudaku or Hookah tobacco  72%
All goods, excluding pan masala containing tobacco ‘gutkha’, with brand name 96%
Chewing tobacco without lime tube 160%
Pan masala (Gutkha) containing tobacco  204%
Chewing tobacco with lime tube 142%

Also Read: GST Compensation Cess: Impact, Mechanism, and Role

Conclusion

It’s essential to comprehend the GST cess to navigate India’s tax system. A cess is an additional tax imposed on particular goods and services for different objectives, such as supporting sector-specific requirements or financing social programs.

For example, the GST compensation cess helps governments compensate for revenue deficits. These examples show how cess functions inside the GST system and emphasize its complex role in supporting socio-economic goals and fiscal policy.

FAQs

  • What is cess in GST with example?

The price of the registered items before GST is used to compute the GST cess. For instance, the compensating cess on a tonne of coal is Rs. 400. A 400 rupee GST cess must be paid if a tonne of coal sold for Rs. 5,000 is valued. In addition, there would be Rs. 250 in GST at a rate of 5%. Therefore, there would be a total GST liability of Rs. 750 for the coal supply. 

  • How does GST cess work?

A tax levied in addition to a taxpayer’s basic tax due is known as a cess. When the government wants to generate money for certain things, it imposes a cess. A cess is not the same as any other tax the government collects, including excise duties, goods and services, and income taxes.

  • What is the reason to implement cess in GST?

This cess aims to make up for the revenue losses suffered by the states due to the introduction of GST on July 1, 2017, either for a five-year term or as long as the GST Council recommends.

  • What is the cess rate?

At 4%, the cess rate is set. Depending on a taxpayer’s total income, the surcharge rate might be 10%, 15%, 25%, or 37%. Authorities determine the cess on the overall tax and surcharge.

  • Who has to pay the cess tax?

All qualified taxpayers are required to pay an additional cess on direct taxes. However, the producer of such products and services is responsible for paying a cess imposed on indirect taxes, such as GST.

  • What is the interest rate on GST cess?

According to Section 50 (1) of the Act, any individual who is required to pay tax under the terms of the Act or Rule and has neglected to do so within the allotted time frame must pay interest at the rate of 18% annually for the period during which the unpaid tax was delayed.

  • Is it mandatory to pay cess?

A cess is an extra tax charge that is required to be paid by all taxpayers with taxable income.

  • What is the full form of Cess?

“Central Excise and Service Tax” is referred to as CESS. In India, the phrase is mainly used about taxes.

  • What is the difference between cess and surcharge?

A cess is added to the tax amount for a specific purpose, while a surcharge is applied to the payable tax and can be utilized for any purpose.

  • What are some types of cess in India?

Some cess applicable in India are GST compensation cess, national calamity contingent duty on tobacco and tobacco products, and building and other construction workers’ welfare cess.

author avatar
Niharika Kapoor Content Writer
Niharika is a Freelance Content Writer and Translator with a Master of Arts in Literature. She has 5+ years of working in the same and has worked in different industries.

Leave a Reply