Whether Compensation Cess Is Leviable On Goods Supplied To Merchant Exporter: Gujarat High Court Asks GST Council To Decide

The  Gujarat High Court has referred a matter to the GST Council to decide on whether the compensation cess is leviable on goods supplied to merchant exporter.

The Division Bench of Justices Bhargav D. Karia and D.N. Ray observed that “……..no notification is issued by the Central Government or State Government under the Compensation Cess Act and therefore, the assessee is made liable to pay Compensation Cess at normal rate i.e. 160% on the supply of goods to merchant exporters for export…….”

The bench was addressing the issue of whether the assessee is liable to pay Compensation Cess at the rate of 160% on the supply of goods to the merchant exporters for export or no Compensation Cess is payable or at-least nominal/concessional Compensation Cess at the rate of 0.1% is payable by applying Notification No.40/2017 and Notification No.41/2017 dated 23.10.2017.

In this case, the assessee/petitioner is engaged in the business of manufacture of branded tobacco products falling under HSN 24039910 on which GST is payable at the rate of 28% and Compensation Cess is payable at the rate of 160%.

The assessee has challenged the order for levy of goods and service tax in form of compensation Cess at the rate of 160% on branded tobacco products i.e. scented/flavoured chewing tobacco manufactured by the assessee for export through merchant exporters which are subject to GST at 0.1% as per Notifications No.40/2017 and 41/2017 dated 23/10/2017.

The assessee submitted that the assessee is subject to payment of 0.1% GST on the goods manufactured by the assessee i.e. branded tobacco products falling under HSN 24039910 for export instead of 28% rate of GST.

As per the assessee Compensation Cess is payable at the rate of 160% on the branded tobacco product which are sold in the domestic market, however, Compensation Cess is not leviable on the branded tobacco products which are exported and therefore, the assessee is not liable to pay the Compensation Cess on the goods supplied to merchant exporter.

The department submitted that that there is no exemption notification issued by the Central Government to for exemption from levy of Compensation Cess on the inter-state supply and the same rate would be applicable to the goods which are sold by the assessee to the merchant exporter for exports.

It was further submitted that issuance of notification of exemption from levy of GST is a policy decision and the notification issued for the purpose of exemption of the goods to be exported by restricting the levy to 0.1% on CGST, SGST and IGST cannot be applied to Compensation Cess to be levied under the Compensation Cess Act.

When there is no revenue loss, there is no purpose of levy of Compensation Cess at the normal rate of 160% as the same is required to be refunded to the merchant exporter on export of goods as per provisions of section 54(3) of the GST Act read with section 16 of the IGST Act, stated the bench.

The bench opined that “…….Compensation Cess Act is brought on statute to provide compensation to the States for loss of revenue arising on account of implementation of good and services tax in pursuance of the provisions of the Constitution (One Hundred and First Amendment) Act, 2016 and as per section 5 of the Compensation Cess Act, various Acts are subsumed into Goods and Services Tax Act. Therefore, Compensation Cess as per the provisions of section 7 is payable to the States during the transition period as per the method prescribed in the said section, considering the projected revenue for any year calculated as per provisions of section 6 of the Compensation Cess Act…….”

In view of the above, the bench referred the matter to GST Council to decide the issue as to whether exemption is required to be granted on levy of Compensation Cess on supply of goods to merchant exporters for export at par with exemption granted for levy of GST and IGST in excess of 0.1% so as to enable the assessee to avail input tax credit or refund as the case may be as per the provisions of section 16(3) of the IGST Act read with section 54(3) of the GST Act.

Case Title: M/s Sopariwala Export Pvt. Ltd. v. Joint Commissioner, CGST and Central Excise & Ors. 

Case Number: R/SPECIAL CIVIL APPLICATION NO. 6701 of 2023

Counsel for Petitioner/ Assessee: V Sridharan 

Counsel for Respondent/ Department: Utkarsh Sharma