India: Supreme Court validates compensation cess

October 28, 2018


The enactment of the novel tax regime of the Goods and Services Tax (hereinafter referred to as “GST”) as a single taxation system applicable on value addition at each state subsuming excise duty, additional excise duty, service tax, value added tax, sales tax, octroi, luxury tax, etc.

Compensation Cess

GST compensation cess is collected to provide compensation to the States for the loss of revenue arising on account of implementation of GST. The question regarding the validity of GST (Compensation to States) Act, 2017 (hereinafter referred to as “GST Compensation Act”) enacted by the Parliament as well as GST Compensation Rules, 2017 (hereinafter referred to as “GST Compensation Rules”) framed by the Central Government. The Supreme Court of India vide its judgement dated October 3, 2016 provides clarity on the validity of compensation cess.[1] Some of the points discussed therein are stated as below:

  • The validity GST Compensation Act in furtherance to Section 18 of the Constitution (One Hundred and First Amendment) Act, 2016 (hereinafter referred to as the “Constitution Amendment Act”) enabling the Parliament to levy a cess for 5 years to compensate the States for the loss of revenue due to GST and Article 270 of the Constitution of India, the Parliament can levy cess for a specific purpose under a law made by it. The Court recognized that the Constitution provision empowers the Parliament to provide compensation to the States for the loss of revenue that occurred at the States and the expression “law” is of wide import which includes levy of any cess for the above purpose.
  • It was held that the Parliament has full legislative competence to enact any Act having been enacted to implement the Constitution Amendment Act in order to fulfil its object thus the GST Compensation Act does not violate nor is against the objective of Constitution Amendment Act and the same is not a colourable legislation.
  • Levy of Compensation to States Cess is an increment to GST which is allowed in law. It was observed that that two taxes/ imposts which are separate and distinct, and on two different aspects of a transaction are permissible as “in law there is no overlapping”.
  • It was noted that the Clean Energy Cess and the States Compensation Cess are collected for wholly different purposes. Therefore, no set-offs can be claimed in lieu of either cess by the payment of the other. The Clean Energy Cess was levied and collected for the purposes of financing and promoting clean energy initiatives, funding research in the area of clean energy, etc. GST Compensation Cess is collected to provide for compensation to the States for the loss of revenue arising from GST implementation.

The Apex Court vide its recent judgement lays down clarity with respect to the constitutional validity of the compensation cess. The said order of the judicial body not only distinguished the levying of taxes of different nature but also upheld the imposition of the same.

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