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.

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%.

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.

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Difference Between GST Compensation Cess And Income Tax Cess?

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.

Komal Bajpai

Author

Updated: 12-10-2025 at 11:25 PM

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 and income tax and much more.

Overview

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 reference.

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, 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 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 The GST Compensation Cess?

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 Cess Act 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 luxury and demerit goods until the revenue gap of states is addressed.

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 the 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 CST Compensation Cess?

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

Aerated drinks
Tobacco products
Coal and lignite
Luxury cars

GST Compensation Cess Rates

The table below highlights the key insights of the GST Compensation cess rates. Read the table below to understand it better:-

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

How Is GST Compensation Cess Is Calculated?

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?

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 they 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 Eligible For 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.

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.

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. Stay informed with Jaagruk Bharat for the latest on IRDA guidelines, gst cess, cess on GST, and more government policies.

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