What is Cess in GST and How Does It Work?

Introduction

Imagine purchasing a luxury SUV worth INR 1 crore, only to discover that in addition to the standard 28% GST, a 20% GST cess is levied. This extra tax significantly increases your total cost. Similarly, when purchasing cigarettes, GST at 28% is applied, along with a specific tax of INR 4,170 per 1,000 sticks.

This additional tax, known as GST cess, is a crucial component of India’s Goods and Services Tax system. It was introduced to compensate states for revenue losses following the implementation of GST. Unlike the general GST that applies to most goods and services, tax is selectively applied to certain categories, like luxury and sin goods, as well as products that are environmentally harmful.

In this article, we will break down what is cess in GST, how it works, its rules, and the impact it has on businesses and consumers. We’ll also dive into GST compliance, the valuation rules in India, and the step-by-step process to calculate GST Charges for different products.

What is GST Cess?

GST Cess is an additional tax over and above the regular GST taxable value applied to specific goods and services. It was introduced as part of the GST tax filing process to:

1. Compensate States for Revenue Loss: After the introduction of GST, states lost the power to levy certain indirect taxes like VAT and luxury tax. The GST compensation extra charges helps replace this lost revenue by ensuring states receive 14% annual growth in their revenues.
   
2. Discourage the Consumption of Sin Goods: Goods like tobacco, cigarettes, and aerated drinks are taxed at a higher rate through cess to reduce consumption, which also aids public health goals.
   
3. Environmental Concerns: Goods that have negative environmental impacts, such as coal, are subjected to cess to promote renewable energy and reduce harmful emissions.

Why is GST Cess Levied?

The GST compensation cess primarily serves to fulfill the following objectives:

1. Revenue Compensation for States:
   • Post-GST, states no longer have the authority to levy indirect taxes like VAT and luxury taxes.
   • The GST compensation cess ensures that states maintain revenue parity and receive a growth rate of 14% annually.
   • Between July 2017 and March 2023, over INR 7.36 lakh crore was disbursed to states.
     
2. Discouraging Consumption of Sin Goods:
   • Sin goods like cigarettes and tobacco have higher cess rates. This is done to reduce their consumption and mitigate their negative health impacts.
   • For example, the cess on cigarettes alone contributes about INR 32,000 crore annually to the economy.
     
3. Environmental Considerations:
   • Goods that contribute to environmental damage, like coal, are subjected to cess, with funds being diverted to renewable energy initiatives. For instance, in FY 2022-23, the government collected INR 25,000 crore in coal cess to fund such projects.

Goods and Services Subject to GST Cess rules

The GST charges rules apply to specific categories of goods and services, including:

1. Luxury Goods:
   • Motor Vehicles: Luxury cars with engines exceeding 1500cc are taxed with a 28% GST, plus a cess ranging from 1% to 22% depending on the engine capacity.
   • Aerated Drinks: These beverages attract a 28% GST and an additional 12% cess.
     
2. Sin Goods:
   • Cigarettes and Tobacco: Tobacco products are taxed at a 28% GST, with additional cess up to 290% on tobacco products like pan masala.
   • Cigarettes: A cess is levied per stick, for example, INR 4,170 per 1,000 sticks.
     
3. Environmentally Harmful Goods:
   • Coal: A fixed cess of INR 400 per metric ton is imposed on coal to fund renewable energy initiatives.
   • Latest Data: The government collected INR 52,500 crore from automobile cess in 2023.

How to Calculate and Pay GST Cess?

Step-by-Step GST Cess Calculation

To understand how GST cess is calculated, let’s take an example of purchasing a luxury car:

1. Car Price: INR 50,00,000
2. GST (28%): INR 14,00,000
3. GST Cess (20%): INR 10,00,000
4. Total Tax Payable: INR 24,00,000

Other examples include:

• Cigarette Pack: GST (28%) + INR 4,170 per 1,000 sticks.
• Aerated Drinks: GST (28%) + 12% Charges.
• Coal Purchase: If you purchase 10 metric tons of coal, cess will be INR 4,000 (INR 400 per ton).

How to Pay GST Cess?

• GST cess is paid through the GST filing process by submitting returns via GSTR-1 and GSTR-3B.
• Businesses must report extra charges under the relevant section in their GST returns.
• The cess is then deposited into a compensation fund, which is used to ensure that states receive the appropriate amount of compensation.

Impact of GST Cess on Businesses and Consumers

Impact on Businesses

1. Increased Cost of Production: GST cess raises the production costs for manufacturers, particularly in sectors like automobiles and tobacco.
   
2. Additional Tax Compliance: Businesses must incorporate the cess amount into their tax filing, increasing the complexity of GST compliance.
   
3. Pricing Strategies: Higher cess impacts the final price of goods, which in turn affects consumer demand.
   
   • Automobile Industry: Companies in this sector face increased operational costs due to the high cess on luxury cars. This has led to a 12% decline in SUV sales in 2023.

Impact on Consumers

1. Higher Purchase Prices: The consumer pays the price for the GST extra charges, resulting in higher costs, especially for luxury goods.
   
2. Reduced Affordability: The increased prices of sin goods like cigarettes and aerated drinks reduce their affordability, discouraging consumption.
   
3. Promoting Sustainable Consumption: The environmentally harmful goods cess encourages sustainable choices, like using renewable energy.
   
   • Cigarettes: Sales have declined by 8% in the past two years due to higher taxation.

Common Mistakes to Avoid in GST Cess

1. Incorrect Cess Calculation: Failing to account for the right cess rates can lead to underreporting, which could result in penalties.
2. Not Reporting Cess in Returns: Businesses must ensure cess is reported under the appropriate section of GSTR-1 and GSTR-3B.
3. Assuming ITC on Cess: Remember, Input Tax Credit (ITC) cannot be claimed on cess.

Conclusion

Understanding GST Charges is vital for businesses and consumers alike. While it helps states recover lost revenue and targets the consumption of harmful goods, it also has a significant impact on pricing and demand. Businesses must comply with GST compliance rules to avoid penalties and ensure accurate tax filing. Platforms like RegisterKaro can help simplify the GST tax filing process and ensure proper valuation rules in India are followed for accurate calculation.

At RegisterKaro, we provide expert solutions for GST compliance, helping you accurately calculate GST charges, file returns, and avoid discrepancies. Our AI-powered audits reduce tax discrepancies by up to 90%, ensuring seamless GST compliance. Contact us today to simplify your GST filing and compliance process!

Frequently Asked Questions (FAQs)

1. What is cess in GST?
   Cess is an additional tax applied over and above the GST on certain goods and services.
   
2. How is GST cess calculated?
   GST cess is calculated based on the value of the good or service, often as a percentage or fixed amount.
   
3. Can GST cess be claimed as an input tax credit (ITC)?
   No, input tax credit cannot be claimed on GST charges.
   
4. Is GST cess applicable to exports?
   No, exports are exempt from GST charges.
   
5. How do I pay GST cess?
   GST charges is paid through GSTR-1 and GSTR-3B returns.
   
6. Which goods are taxed with GST cess?
   Luxury, sin, and environmentally harmful goods are taxed with GST charges.
   
7. Can businesses claim input tax credit on GST cess?
   No, input tax credit is not allowed on cess.
   
8. What is the rate of cess on luxury cars?
   The cess rate for luxury cars ranges from 1% to 22%, depending on engine capacity.
   
9. How much cess is applied to coal?
   The cess on coal is INR 400 per metric ton.
   
10. What is the purpose of GST cess?
    The primary purposes are revenue compensation for states and reducing consumption of harmful or luxury goods.