WHAT IS CESS IN GST INDIA? MEANING, RATES, AND APPLICABILITY

The GST framework in India has undergone a significant transformation, effective from 22 September 2025. One of the most notable changes concerns the GST Compensation Cess, a levy originally introduced to protect state revenues during the transition to the Goods and Services Tax regime. With the latest policy updates, the cess has been removed for nearly all goods, except for tobacco and related products, which continue to attract the levy until outstanding state compensation loans are repaid.

This article provides a clear understanding of the current provisions, including what is cess in GST, how it operates today, and what taxpayers must know to remain compliant.

Platforms like TMWala help businesses track GST rate changes, cess applicability, and automatically update their invoicing and tax calculations.

MEANING AND RELEVANCE TODAY: CESS ON GST

While the cess has largely served its original function, its continued limited application ensures that previously borrowed funds are repaid without burdening general government revenues. The transition to a more streamlined GST system in 2025 has reduced taxpayer complexity, with only tobacco products retaining the earlier cess framework.

UNDERSTANDING THE PURPOSE OF GST COMPENSATION CESS

The term GST cess refers to a special levy introduced under the GST Compensation Cess Act 2017, designed to ensure compensation to states under GST for revenue losses after the introduction of GST in 2017. Since GST is a destination-based tax, states that produce or export goods are likely to experience revenue shortfalls. The cess was imposed on select goods to bridge this gap.

Initially intended to last five-year periods, the cess remained in force beyond 2022 due to revenue disruptions caused by the COVID-19 pandemic, during which the central government borrowed funds to maintain state compensation. The current cess collection is used to repay these borrowings.

SCOPE OF CESS AFTER SEPTEMBER 2025: WHAT REMAINS TAXABLE?

With the unveiling of the revised rate structure at the 56th GST Council Meeting in September 2025, the tax system was simplified into three broad rate categories:

• 5 percent (merit goods),
• 18 percent (standard goods and services), and
• 40 percent (sin and luxury items).

Simultaneously, cess on GST was discontinued for almost all commodities.

However, cess applicable on GST continues for a specific group of products, namely:

• Cigarettes
• Pan masala
• Gutkha
• Chewing tobacco, including zarda
• Unmanufactured tobacco
• Beedis

These items will remain under the existing cess framework until the central government fully clears the outstanding loans and interest liabilities previously taken to compensate states. Once repaid, these products will be subject only to the standard 40 percent GST rate or any new levy that may be introduced in the future.

GOODS NO LONGER LIABLE FOR COMPENSATION CESS

A substantial list of products has now been exempted from the compensation cess owing to the 2025 reforms. Some notable categories include:

• Aerated waters and carbonated beverages
• Fruit-based carbonated drinks
• Coal and similar solid fuels
• Luxury cars and SUVs
• High-end motorcycles (over 350cc)
• Private aircraft and yachts
• Admission to sports events and entertainment, such as professional leagues
• Betting, online gaming, and casino activities

CURRENT GST AND CESS RATES FOR TOBACCO PRODUCTS

Despite the broader withdrawal of the cess, tobacco-related products continue to be taxed under the earlier rate structure, which features a 28 percent GST rate plus a fixed cess amount based on product type and size. The cess remains a specific rate per thousand units for cigarettes and a fixed monetary amount per kilogram or per thousand pieces for other tobacco items.

These rates will stay in effect until the compensation loans are fully serviced, after which the government plans a comprehensive restructuring of tobacco taxation.

INPUT TAX CREDIT ON GST COMPENSATION CESS

Input Tax Credit (ITC) rules for the compensation cess remain unchanged. Taxpayers may claim ITC on the cess only to offset their own cess liability on outward supplies. It cannot be used to pay CGST, SGST, or IGST. The restriction ensures that the cesspool is exclusively used for its intended purpose, servicing outstanding state compensation liabilities.

WHEN MUST A TAXPAYER COLLECT COMPENSATION CESS?

All registered suppliers dealing in goods that still attract the levy must collect and remit the cess, except for exporters and taxpayers registered under the Composition Scheme. Imports of tobacco and related products also attract the compensation cess in addition to customs duties and IGST.

Exporters, however, may claim refunds of cess paid on exported goods, maintaining the zero-rated nature of export supplies under GST.

HOW TO CALCULATE CESS ON GST

As compensation cess now applies only to a narrow range of goods, its calculation remains straightforward.

1. Identify the applicable GST rate and cess amount for the product.
2. Determine the taxable value of the supply.
3. Apply the fixed cess amount (for tobacco products, this is usually a rate per thousand units).

Even though many goods no longer require a separate cess calculation due to the new consolidated GST rates, tobacco products must still account for the cess independently.

FINANCIAL MANAGEMENT OF CESS COLLECTIONS

Although compensation payments to states ended in June 2022, the cess continues to be collected solely to repay loans raised during periods of revenue shortfall. All cess proceeds are credited to the GST Compensation Fund and applied to the repayment of interest and principal. Any surplus remaining after complete repayment will subsequently be distributed to states in accordance with statutory revenue-sharing principles.

CONCLUSION

The GST reforms implemented in September 2025 have substantially altered the landscape of special levies under GST. The compensation cess, once widely applied to numerous goods, has now been restricted to tobacco and related items pending full repayment of compensation loans. The updated rate structure simplifies compliance, provides clarity for businesses, and supports the final phase-out of the cess mechanism over the coming years.

Understanding what cess in GST is, the meaning of GST cess, and the scope of cess applicable to GST remains essential for businesses that continue to deal with tobacco products or require clarity on GST compliance. The policy direction aims to move toward a simplified, stable, and transparent tax framework while ensuring that historic commitments made to the states are fully honoured.

Tools like TMWala enable businesses to stay compliant effortlessly by automating GST calculations, cess applicability, and invoice updates, supporting a smooth transition into the simplified post-2025 tax regime.

FAQs

1. What is cess in GST?
   Cess is a special levy charged on select goods.
2. Is GST Compensation Cess still applicable in 2025?
   Yes, but only on tobacco and related products.
3. Which products still attract GST cess after September 2025?
   Cigarettes, beedis, pan masala, gutkha, chewing tobacco, and unmanufactured tobacco.
4. Why was the cess continued beyond 2022?
   It continues to repay loans taken by the Centre to compensate states during revenue shortfalls.
5. What goods no longer attract compensation cess?
   Items like luxury vehicles, aerated drinks, high-end motorcycles, coal, and online gaming.
6. What are the current GST and cess rates for tobacco products?
   They attract a 28% GST plus a fixed cess amount depending on product type and size.
7. Can ITC be claimed on Compensation Cess?
   Yes, but it can only be used to pay cess liability, not CGST, SGST, or IGST.
8. Do exporters need to pay cess?
   They may pay cess on inputs but can claim a refund since exports are zero-rated.
9. How is GST cess calculated?
   Apply the fixed cess rate (often per thousand units) to the taxable value of the product.
10. How can TMWala help businesses with GST cess compliance?
    TMWala automates GST rate updates, cess calculations, and invoicing to prevent compliance errors.