Gujarat HC Calls on GST Council to Review 160% Compensation Cess on Merchant Exporter Supplies [Read Order]

In the recent judgement, The Ahmedabad Bench of Gujarat High Court called upon the GST (Goods and Services Tax ) Council to review the issues related to exemption from 160% Compensation Cess on supplies to Merchant Exporters, while restricting it with alignment of GST and IGST rates.

The Bench comprising Justice Bhargav D. Karia and Justice D.N Ray, heard and reviewed the matter, filed by the Petitioner.

The Petitioner prayed for quashing and setting aside the impugned order for levy of GST in the form of Compensation Cess at the rate of 160% on branded tobacco products subjected to GST at 0.1% as per Notifications No.40/2017 and 41/2017 dated 23/10/2017.

The petitioner, Sopariwala Pvt. Ltd., engaged in the business of manufacture of branded tobacco products, on which Compensation Cess was payable at the rate of 160% and GST at the rate of 28%, where the goods were exported directly or through merchant exporters were manufactured by the petitioner itself. In the present case, the petitioner and most of its group entities also act as merchant exporters.

The petitioner argued that no Central Excise duty or VAT was payable on such supplies under the GST Regime. The GST Council on its 22nd Meeting held on 06.10.2017, recommended exemption of tax on supplies to merchant exporters in excess of 0.1% with effect from 23.10.2017 to prevent working capital blockages. It was decided that the rate of tax on supplies to merchant exporters will be restricted to 0.1% only.

The petitioner claimed input tax credit of the tax charged at 0.1% and could not utilise it, so eventually it had been claimed as refund under section 54 of the GST Act, 2017 which highlighted that these transactions were revenue neutral and transparent in nature. Subsequently, such supplies qualify as zero-rated supplies.

On the other hand, the revenue counsel argued that no specific exemption notification existed for Compensation Cess, so the normal rate 160% was applicable. They interpreted that these tax exemptions are policy decisions and the court should not interfere in it, though an alternative appellate remedy can be availed.

After considering the arguments, the high court acknowledged that the supplies to Merchant Exporters were indeed part of Export supply and qualified as "zero-rated supplies" under the IGST Act, 2017 following Supreme Court Precedents in Amritsar Sugar Mills and Lord Krishna Sugar Mills.

The court pointed out the "revenue neutral" nature of the Compensation Cess, that if collected under section 54 of GST Act, 2017, it would be refunded, defeating the concern previously addressed by the GST Council. The court held the application Mutatis mutandis.

While refraining from issuing a direct order for exemption due to the absence of a specific notification, the Court strongly urged the GST Council to reconsider the issue.

The court directed that the Compensation Cess at 160% to be at Abeyance until the council reviews and makes recommendations for granting exemptions, aligning with GST and IGST rates.

The court directed no coercive action but expressed early resolution by the GST Council.

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