Gujarat HC Asks GST Council to Decide Leviability of Compensation Cess on Goods Supplied to Merchant Exporter [Read Order]

The Gujarat High Court has requested that the GST Council determine whether products provided to merchant exporters are subject to the compensatory cess.

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By applying Notification No. 40/2017 and Notification No. 41/2017 dated 23.10.2017, the bench was addressing the question of whether the assessee, Sopariwala Export Pvt. Ltd., is required to pay Compensation Cess at the rate of 160% on the supply of goods to merchant exporters for export, or if no Compensation Cess is payable or at least nominal/concessional Compensation Cess at the rate of 0.1% is payable.

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In this instance, the assessee/petitioner is involved in the production of branded tobacco products under HSN 24039910, for which 160% compensation cess and 28% GST are due.

According to Notifications No. 40/2017 and 41/2017 dated 23/10/2017, the assessee has contested the order to levy goods and service tax in the form of a compensation cess at a rate of 160% on branded tobacco products, such as scented or flavor-infused chewing tobacco, that are manufactured by the assessee and exported through merchant exporters that are subject to GST at a rate of 0.1%. The assessee argued that, rather than paying the 28% GST rate, the assessee must pay 0.1% GST on the commodities it manufactures, such as branded tobacco products that come under HSN 24039910 for export.

Compensation Cess is due at a rate of 160% on branded tobacco products sold in the domestic market, according to the assessee. However, it is not imposed on branded tobacco products that are exported, so the assessee is not responsible for paying the compensation cess on goods supplied to merchant exporters. The department argued that the Central Government had not given any notice of exemption from the Compensation Cess levy on interstate supplies, and that the same rate would apply to items sold by the assessee to merchant exporters for export.

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Furthermore, it was argued that the notification intended to exempt goods from the GST levy by limiting the levy to 0.1% on CGST, SGST, and IGST is a policy decision and cannot be applied to the Compensation Cess that will be imposed under the Compensation Cess Act. According to the bench, there is no reason to impose the Compensation Cess at the standard rate of 160% when there is no revenue loss because, in accordance with section 54(3) of the GST Act read with section 16 of the IGST Act, the money must be returned to the merchant exporter upon export of goods.

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The Division Bench of Justices Bhargav D. Karia and D.N. Ray stated that since neither the Central Government nor the State Governments have issued notifications under the Compensation Cess Act, the assessee is responsible for paying the compensation cess at the standard rate, which is 160% of the supply of goods to merchant exporters for export.

In order to allow the assessee to receive an input tax credit or refund, as applicable, in accordance with section 16(3) of the IGST Act read with section 54(3) of the GST Act, the bench referred the matter to the GST Council to determine whether an exemption from the levy of the Compensation Cess on the supply of goods to merchant exporters for export is necessary, on par with the exemption granted for the levy of GST and IGST in excess of 0.1%.

To Read the full text of the Order CLICK HERE

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