Which goods feature GST compensation cess?
The GST compensation cess applies to “demerit” or “sin” goods and certain luxury items. After GST Reform 2.0 (effective 22 September 2025), the cess has been merged into a single GST rate for most of these items.
Goods under this category include:
- Luxury cars
- Aerated and caffeinated drinks
- Pan masala
- Motorcycles above 350cc
- Revolvers, pistols, and other specified items
- Tobacco products (which still carry a separate cess for now)
GST compensation cess rates of goods
The latest reforms have simplified the cess structure by consolidating it into a single GST rate for most sin and luxury items. Tobacco remains an exception.
Goods/Services
|
Old GST Rate + Cess (Before 22 Sept 2025)
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New GST Rate (Inclusive of Cess)
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Luxury Cars
|
28% GST + 22% Cess
|
40% GST
|
Aerated Drinks
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28% GST + 12% Cess
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40% GST
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Coal & Lignite
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5% GST + ₹400/ton Cess
|
18% GST
|
Tobacco Products
|
28% GST + Variable Cess
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28% GST + Variable Cess (no change yet)
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Note on tobacco products: These will continue to attract 28% GST plus a variable cess until the Centre clears its pending compensation loans to states. After this, they are expected to shift to the new 40% slab.
Input tax credit and GST compensation cess
Input Tax Credit (ITC) allows businesses to claim credit for the GST paid on inputs, capital goods, and services used in their operations. This credit can also be used to offset GST liabilities, including the GST Compensation Cess. By availing ITC on cess paid for inputs, businesses can lower their overall tax burden. Proper reporting requires filing GSTR-3B, the main summary return for GST payments, which is auto-populated using GSTR-2B.
Current status and distribution of GST compensation cess
The earlier distribution method, which assured states 14% annual revenue growth, ended in June 2022. Since then, cess collections are no longer transferred as direct compensation. Instead, the revenue is pooled into a dedicated account to service interest and repay the principal of loans taken by the Central Government to cover state revenue shortfalls during the pandemic.
How to calculate GST compensation cess?
To calculate the GST Compensation Cess, you must first determine the applicable rate for the goods. With the new reforms, the cess is now part of the final GST rate for many products.
- Determine rate: Identify the applicable GST rate (e.g., 40% for luxury cars).
- Calculate taxable value: Work out the value of the supply.
- Compute tax: Apply the consolidated rate directly to this value.
- Example: On a luxury car worth ₹20,00,000, GST = 20,00,000 x 40% = ₹8,00,000.
- Remit tax: Pay the GST (including cess portion) to the government.
- Keep rcords: Maintain documentation for compliance and audits.
Conclusion
In conclusion, keeping pace with the updated GST and cess regulations is crucial for businesses to remain compliant and manage tax liabilities efficiently. With a clear understanding of the simplified rate structure and effective use of input tax credit, companies can strengthen their financial strategies, enhance creditworthiness, and even secure a business loan to expand operations and grow confidently in today’s evolving tax environment.
