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%.

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GST Compensation Cess vs Health & Education Cess — Full Comparison with Rates | Jaagruk Bharat

Q: 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.

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.

Q: 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.

Pragya Pathak

Author

Updated: 11-03-2026 at 3:30 PM

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500K+ Users

GST compensation cess and income tax cess are both forms of levies, but are applied to different things. GST cess compensation is specific to certain goods, like luxury and demerit category goods. Income tax cess is an additional levy applied to specific government initiatives relating to health and education. Understanding both requires looking into the GST Compensation Cess Act, calculation methods, and their overall impact.

In this article, you will get the detailed information about the GST Compensation and its difference with compensation cess, income tax, and much more.

At A Glance: GST Compensation Cess vs Income Tax Cess (Comparison Table)

Understanding the difference between GST compensation cess and income tax cess is essential, as both serve distinct purposes in India’s taxation system. The table below summarises the key aspects for quick comparison:

Aspect	GST Compensation Cess	Income Tax Cess
Purpose	To compensate manufacturing states for revenue loss due to GST implementation	To fund specific government initiatives like education and healthcare
Applicability	Levied on certain goods (luxury & demerit goods) under the GST Compensation Cess Act	Levied on every taxpayer, including individuals, HUFs, companies, and firms
Examples	Luxury cars, aerated drinks, tobacco, and coal	4% cess on income tax (Education & Health)
Calculation	Based on taxable value + cess rate (e.g., Rs. 400 per tonne of coal)	Percentage of income tax (currently 4%)
Input Tax Credit	Available for businesses under the input tax credit of cess under GST	Not applicable
Key Question	Is GST compensation cess still applicable? – Yes, for specific goods	Universally applicable to all taxpayers

What Is GST Compensation Cess? Definition, Legal Basis & Purpose

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 was introduced under the GST (Compensation to States) Act 2017 to compensate states for revenue losses. This ensures that manufacturing states are not left at a disadvantage. But is GST compensation cess still applicable? Yes, it continues to apply to sin goods until the revenue gap of states is addressed. All the collections from the cess are deposited into a separate GST compensation fund maintained by the central government. The money from the fund is then distributed among state governments to fill in the revenue gaps.

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 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, understanding how to calculate cess on GST is crucial since it has a direct impact on the price.

What Goods Come Under GST Compensation Cess?

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

Aerated drinks
Tobacco products
Coal and lignite
Luxury cars

Which Goods Attract GST Compensation Cess? (With Rates)

The table below highlights the key insights of the GST Compensation cess rates on goods, like the Coal/tobacco/aerated drinks cess rate or demerit goods/sin goods. Read the table below to understand it better.

Applicable Goods

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 a cigar	21% or Rs. 4170 per thousand
Cigarettes containing tobacco, apart from filter cigarettes, of a length of 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 a 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

For tobacco-based products, businesses must often perform GST cess on tobacco calculation to estimate costs, using a GST compensation cess and income tax cess calculator as a reference.

Who Collects and Remits GST Compensation Cess?

The GST compensation cess operates as per the guidelines mentioned in the Goods and Services Tax of India. It applies to several goods, including luxury and sin goods. The cess is collected by the seller from the buyer at the time of purchase and is then reported in GST returns, post which it is remitted to the central government. The cess collection process is not so different from the GST collection process. The cess is filed while filing the GSTR-3B cess reporting of their business, which is the monthly summary under GST.

Also, it is to be noted here that taxpayers registered under the GST Compensation Cess can avail the benefits of the Composition scheme cess exemption.

How To Calculate GST Compensation Cess — Worked Example

How to calculate cess on GST? It is based on the value of taxable goods and services.

For example:

Mr Akhil purchased 2 tonnes of coal worth Rs. 14,000. With a fixed cess of Rs. 400 per tonne, Rs. 800 would be levied. This is a simple GST Compensation Cess example that shows how it applies in real life.

Another GST compensation cess and income tax cess example would be when a manufacturer of tobacco pays cess on raw goods and later claims input tax credit of cess under GST for resale.

What Is Income Tax Cess? Health & Education Cess Explained

Income tax cess is imposed for specific government initiatives like education and health. Unlike gst cess, it is not on consumption but directly on taxpayers.

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 it 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%.

This levy continues annually. Like GST, one can also work out the impact through a simple gst compensation cess and income tax cess calculator.

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

Who Is Liable to Pay Income Tax Cess?

All taxpayers—individuals, HUFs, companies, and firms—are liable. Even if you’re using a GST compensation cess and income tax cess example, remember that, unlike cess on GST (applied on goods), income tax cess is universal.

Income Tax Cess Rate: 4% on Tax + Surcharge

In the country of India, an income tax cess of 4% is applied on the total amount of tax, including surcharge, officially known as the health and education cess, and operates under the Income Tax Act of 1961. The cess rate is the same for all taxpayers. The 4% cess income tax calculation is simple and begins with determining the entire amount of taxable income, based on which the applicable income tax is calculated as per the tax slab. If the income crosses a certain threshold, a surcharge may have to be applied, after which the tax and surcharge are added, and then the 4% health and education cess is levied.

How to Calculate Income Tax Cess — Step-by-Step Example

The exact steps of calculating the income tax cess are described below for one’s better understanding and reference:

Step 1: Start by determining your taxable income after deductions under sections, like 80C or 80D, or others.

Step 2: Apply the appropriate tax slab to your taxable income and calculate the exact tax amount.

Step 3: If your income is more than the prescribed threshold (like Rs 50 lakh or 1 crore), add the surcharge to the exact tax amount calculated.

Step 4: After adding the surcharge to the total tax, calculate the 4% health and education cess and then pay the final amount.

Key Differences: GST Compensation Cess vs Income Tax Cess

The points that make GST compensation cess different from the Income tax cess are mentioned below in brief points in tabular format:

Component	GST compensation cess	Income tax cess
Meaning	Additional tax is applied on some goods under GST to compensate the loss of states after the implementation of GST	Added tax (comparatively less) to income tax for funding government schemes and services
Under the law	GST (Compensation to States) Act 2017	Income Tax Act of 1961
Applied on	Specific luxury or sin goods, such as tobacco, coal, serrated drinks, and luxury goods	Charged on the total income tax paid by taxpayers
Rates	Varies based on the type of good	Fixed at 4%
Who pays it?	Manufacturers, importers, and suppliers dealing with specific goods	Individual taxpayers, companies
Collected by	By the GST system	By the Income Tax Department

Input Tax Credit (ITC) on GST Compensation Cess: Rules & Restrictions

Input Tax Credit (ITC) on GST Compensation Cess operates as per the GST (Compensation to States) Act 2017, along with the guidelines of GST. As per the guidelines, the ITC on compensation cess can only be claimed when a certain purchased material covered under compensation cess is being used for the production of some other goods.

There are some important rules and restrictions concerning claiming ITC on compensation cess, most of which are described below:

ITC of compensation cess is maintained separately from CGST, SGST, or IGST credits. As it is an independent category, it also implies that it cannot be in any condition used to pay other liabilities, like CGST, SGST, or IGST.
People interested in claiming this cess are strictly required to fulfil all the eligibility requirements.
If the raw materials covered under the compensation cess are imported, the importer pays the cess along with other required charges. After payment, the paid cess can be claimed as ITC if the goods are used for taxable supplies attracting cess.
Exporters dealing with goods covered under compensation cess can claim a refund of the same when exporting the goods as per the GST refund guidelines.

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.

While the GST Compensation Cess Act is revenue protection-driven, the income tax cess is socially driven. Both are tools for nation-building.

2025 GST Reform Update: What Happened to Compensation Cess?

According to the GST Reform 2.0 / September 2025 framework, a simple GST structure was introduced with fewer tax slabs and more organised rules. A major announcement made through this reform was concerning the compensation cess discontinued 2025 for mostly all types of goods, like luxury goods that attracted 28% GST and additional cess.

At present, this discontinuity is still partially present on sin goods, like tobacco-related products, such as cigarettes, pan masala, and chewing tobacco.

Cess Vs Surcharge Vs Tax: What Is the Difference?

The difference between Cess vs surcharge difference along with tax are laid down below in a tabular format for one’s reference:

Component	Cess	Surcharge	Tax
Meaning	An extra charge is added to the tax for specific purposes	Added charges on tax for high-income-earning taxpayers	A mandatory charge imposed on goods, services, and income
Legal framework	Under the provisions of the budget	Under income tax provisions	Operates as per laws like the Income Tax Act of 1961
Applied on	On tax or on some goods, based on the cess type	On the income tax paid by individual taxpayers or companies	Income, goods, services, etc.
Rates	Fixed on 4%	Varies based on income levels	Varies based on the type of tax and the income slab
Examples	Health and Education Cess, GST Compensation Cess	Income tax surcharge	Income tax, GST

Conclusion

While both GST compensation cess and income tax cess play important roles in India’s financial structure, they serve very different objectives. GST Compensation Cess example cases show how it supports states, while income tax cess ensures better education and healthcare.

So, whether you’re checking the GST Cess rate list, running a GST compensation cess and income tax cess calculator, or learning how to calculate cess on GST, understanding the difference is key.

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