What is GST compensation cess?

GST compensation cess is a tax levied on certain goods, such as luxury and demerit goods, to compensate manufacturing states for revenue losses caused by the implementation of GST.

Why was the GST compensation cess introduced?

It was introduced to ensure that manufacturing states do not face financial losses due to the transition from a manufacturing-based to a consumption-based tax system.

Which goods are subject to GST compensation cess?

Goods such as luxury cars, tobacco, and aerated drinks are subject to GST compensation cess.

What is the current rate of income tax cess?

The current rate of income tax cess is 4%.

What is GST compensation cess?

GST compensation cess is a tax levied on certain goods, such as luxury and demerit goods, to compensate manufacturing states for revenue losses caused by the implementation of GST.

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Difference Between GST Compensation Cess And Income Tax Cess?

Q: What is income tax cess?

Income tax cess is an additional tax levied on taxpayers to raise funds for specific government initiatives, such as education and health.

Komal Bajpai

Author

Updated: 22-04-2025 at 12:30 PM

GST compensation cess and income tax cess are both forms of levies but are applied to different things. GST compensation is specific to certain goods, like luxury and demerit category goods. Income tax is an additional tax applied to specific government initiatives relating to health and education.

Learn about the significant differences between GST Compensation Cess and Income Tax Cess in detail below.

What Is The GST Compensation Cess?

Let us understand the GST compensation cess first.

GST is a consumption-based tax, so only the states where the consumption of goods and services happens are eligible for the revenue on supplies. So, states focusing on manufacturing goods will face a decrease in revenue from indirect taxes. States like Maharashtra, Tamil Nadu, Gujarat, Haryana, and Karnataka face a decrease in revenue as they are manufacturing states.

The GST compensation cess is levied to compensate states for revenue losses caused by GST. This is so that manufacturing states will not face losses and will be compensated. But GST compensation is only levied on the supply of certain goods, such as luxury goods.

For luxury cars used for private use, 28% of GST is applicable, and GST compensation will be different for different cars based on different factors such as the car’s engine and the length of the car.

For Gasoline Vehicles:

Cars using LPG, CNG, and petrol, below 1200 cc and with a length of 4 m, will have 28% GST and 1% GST cess.
Cars using LPG, CNG, and petrol below 1200 cc and above the length of 4 m will have 28% GST and 15% GST cess.
Cars using LPG, CNG, and petrol above 1200 cc, irrespective of their length, will have 28% GST and 22% GST cess.

For Diesel Vehicles:

Cars that run on diesel and are below 1500 cc and 4 m in length will have 28% GST and 3% GST cess.
Cars running on diesel below 1500 cc and above 4 m in length will have 28% GST and 20% GST cess.

So, if you are planning to buy a car, remember to consider these factors as well, as they may have a huge impact on the price.

What Goods Come Under CST Compensation Cess?

There are several goods that come under GST compensation. The goods that come under it are as follows:

Aerated drinks
Tobacco products
Coal and lignite
Luxury cars

GST Compensation Cess Rates

Goods	GST Compensation Cess Rate
Luxury cars	22%
Unmanufactured tobacco products (with lime tube)	65%
Unmanufactured tobacco products (without lime tube)	71%
Branded tobacco refuse	61%
Cheroots and cigar	21% or Rs. 4170 per thousand
Cigarettes containing tobacco apart from filter cigarettes, of length more than 65 mm and up to 75 mm	5% + Rs.3668 per thousand
Branded ‘Hookah’ or ‘gudaku’ tobacco	72%
Chewing tobacco (w/o lime tube)	160%
Chewing tobacco (with lime tube)	142%
Pan masala (Gutkha) containing tobacco	204%
All goods, excluding pan masala containing tobacco ‘gutkha’, with brand name	96%
All goods, excluding pan masala containing tobacco ‘gutkha’, not bearing a brand name	89%
Coal, ovoids, briquettes, and similar solid fuels manufactured from lignite, coal, whether or not agglomerated, excluding jet, peat (including peat litter), whether or not agglomerated	Rs. 400 per tonne
Aerated drinks	12%
Coal and lignite	Rs. 400 per ton
Some specific goods	Changes

How Is GST Compensation Cess Is Calculated?

GST Compensation cess is calculated on the basis of the value of the taxable goods and services.

For example, Mr. Akhil purchased 2 tonnes of coal worth Rs. 14000, and as the value of the GST Compensation cess is Rs. 400 per tonne, Rs. 800 would be charged as per the standard rate.

What Is Income Tax Cess?

Income tax is a form of tax that is levied on specific government initiatives, such as education and health. It is imposed when the government is looking to raise funds for specific purposes. Education cash is only used for educational purposes, even if the amount is unspent. The unspent amount cannot be used for other purposes. The amount will be carried forward and used in the following year.

Every taxpayer is liable to pay a fixed cess rate of 4%. For the education cess, the government introduced 2% to meet the needs of the government. This will help in ensuring good quality education for the poor people in India.

However, the government then realised that they needed funds to provide access to secondary and higher education as well. So, in 2007, an additional 1% cess was added to fund secondary and higher education.

But then the government faced another issue that was brought to light by Finance Minister Arun Jaitley in 2008. The government had to start various programmes to meet the educational needs of below-the-line (BPL) and rural families. The cess was then increased by another 1%, making it a total of 4%.

Also Read: Clubbing Of Income Under Section 64 Of The Income Tax Act Rule & Guidelines

Who Is Eligible For Income Tax Cess?

Every taxpayer of the country, including Hindu Undivided Families (HUFs), companies, and firms is mandated to pay income tax cess as per the rules.

Why Were Both Cess Introduced?

The GST compensation cess was introduced to ensure financial stability in manufacturing states that face a loss due to the implementation of GST.

Whereas, income tax revenue helps fund important sectors like education and healthcare, which contribute to the social development of the nation.

Conclusion

While both GST cess and income tax cess play an important role in ensuring balanced economic growth in the nation, there is a significant difference in the working of each. GST compensation cess is typically a consumption-based tax introduced in manufacturing states to ensure financial stability. On the other hand, the income tax cess is levied on government schemes, particularly in health and education.

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