Levy of Compensation Cess on Export Supply Requires GST Council Review

The Hon’ble Gujarat High Court in M/s. Sopariwala Export (P.) Ltd. v. Joint Commissioner, CGST and Central Excise [R/Special Civil Application No(s). 6701 &7073 of 2023, and 15708 of 2024, dated May 09, 2025] held that the levy of 160% Compensation Cess on the supply of branded chewing tobacco products by manufacturers to merchant exporters for export must be kept in abeyance. The matter was referred to the GST Council to decide whether an exemption should be granted at par with the Central Goods & Services Tax (“CGST”)/ State Goods & Services Tax (“SGST”) and Integrated Goods & Services Tax (“IGST”) exemption provided under Notification No.40/2017-Central Tax (Rate), dated October 23, 2017 (“the Notification No. 40/2017”) and Notification No. 41/2017-Central Tax (Rate), dated November 14, 2017 (“the Notification No. 41/2017”) (collectively, “the Notifications”).

Facts:

M/s. Sopariwala Export (P.) Ltd. (“the Petitioner”) is engaged in manufacturing branded chewing tobacco, which attracts 28% CGST/SGST and 160% Compensation Cess. The Petitioner supplied these goods to merchant exporters for export, charging 0.1% CGST/SGST under the Notifications. The Joint Commissioner, CGST and Central Excise (“the Respondent”) initiated an investigation and issued a Show Cause Notice (“the SCN”), followed by an Order-in-Original (“the Impugned Order”) against the Petitioner confirming demand along with interest and penalty, stating no exemption from Compensation Cess was available.

Hence, aggrieved by the Impugned Order, the Petitioner filed the present Writ Petition.

Issue:

Whether  Compensation Cess is leviable on the supply of branded chewing tobacco products to merchant exporters for export?

Held:

The Hon’ble Gujarat High Court in R/Special Civil Application No(s). 6701 &7073 of 2023, and 15708 of 2024as under:

• Observed that, there is no dispute between the parties regarding the supply of goods by the Petitioners to merchant exporters to be considered as “export of goods” in the hands of the Petitioners and therefore, provision of section 16 of the Integrated Goods and Services tax Act, 2017 (“the IGST Act”) would also apply to the supplies made by the Petitioners to merchant exporters as zero-rated supply.
• Relied that, in the case of Amritsar Sugar Mills Co. Ltd. V. Commissioner of Sales Tax, Uttar Pradesh  AIR 1966 SC 1242 and in the case of Lord Krishna Sugar Mills v. Commissioner of Sales Tax, UP Lucknow  (1966) 18 STC 498 (SC) (para 75),the Hon’ble Supreme Court held that in a transaction of taking goods out of Utter Pradesh, to a place out of India, more than one supply can qualify as export supply and therefore, supply by the Petitioners to the merchant exporters would qualify as export supply.
• Observed that, even if the Petitioners are saddled with payment of Compensation Cess at the rate of 160%, merchant exporters shall get refund of the same as per the provisions of section 16 of the IGST Act read with section 54(3) of the CGST Act and therefore, such payment of Compensation Cess would be revenue neutral and in such circumstances, levy of Compensation Cess at the rate of 160% on supply of goods to merchant exporters by the Petitioners would not be sustainable as held in the case of CCE v. Coca-Cola India Pvt. Ltd 2007 (213) ELT 490 (SC).
• Observed that, the Notification No. 40/2017 was issued to exempt intra-State supply of taxable goods for export, from so much of the CGST leviable thereon under section 9 of the CGST Act, as in excess of the amount calculated at the rate of 0.05%, and the Notification No. 41/2017 was issued to grant exemption on IGST leviable upon export in excess of amount calculated at the rate of 0.1% meaning thereby that maximum 0.1% IGST is payable.
• Noted, that no Notification is issued by the Central Government or State Government under the Goods and Services Tax (Compensation to States) Act, 2017(“the Compensation Cess Act”), hence the Respondent were justified in passing the Impugned Order for levy of Compensation Cess at the normal rate of 160% on the supply made by the petitioners to merchant exporters. However, Section 11 of the Compensation Cess Act, provides for applicability of provisions of CGST and IGST Act, mutatis mutandis for levy of Cess as per Section 8 of the Compensation Cess Act. Hence, 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 Section 54 (3) of the CGST Act read with section 16 of the IGST Act.
• Noted that, the Compensation Cess Act is brought on statute to provide compensation to the States for loss of revenue arising on account of implementation of GST and as per Section 5 of the Compensation Cess Act, various Acts are subsumed into CGST Act. Therefore, Compensation Cess is collected to be distributed amongst States to compensate loss of revenue. Therefore, the levy of Compensation Cess is required to be considered at par with levy of GST and IGST.
• Noted further that, the Government is required to issue a similar Notification for granting exemption under the Compensation Cess Act also or extend the benefits of the Notifications for levy of Compensation Cess also on supply of goods by the Petitioners to the merchant exporters on fulfillment of various conditions as prescribed therein.
• Held that, no Notification under Compensation Cess can be issued in absence of any recommendation from GST Council, and, there is no recommendation by GST Council to grant exemption from payment of Compensation Cess at par with GST and IGST on supply of goods for export or supply to merchant exporter. Hence, the GST Council was urged to consider the issue of granting exemption from levy of Compensation Cess at par with CGST and IGST so as to ensure that there is no working capital blockage for manufacturer or exporters due to requirement of upfront payment of Compensation Cess at normal rate on supply of goods to merchant exporters for export which ultimately is required to be refunded considering the fact that no tax is leviable on the export of goods. In this regard, the Court relied on the case of Union of India v. VKC Footsteps India Pvt. Ltd. [(2022) 2 SCC 603].
• Held that, the operation and implementation of Impugned Order are kept in abeyance till the GST Council reconsiders on the issue of recommending exemption from payment of Compensation Cess on the products supplied by the Petitioners to merchant exporters for export at par with recommendation issued for exemption from levy of CGST/SGST and IGST in excess of 0.1% in its 22nd Meeting which has resulted into issuance of the Notifications.

Our Comments:

Section 54 of the CGST Act governs “Refunds of Tax”. Further, Section 54(1) of the CGST Act mentions that any person claiming a refund of tax, interest, penalty, or any other amount may apply to the proper officer within two years from the relevant date.

Section 11 of the Compensation Cess Act states that the provisions of the CGST Act and IGST Act apply mutatis mutandis to the levy and collection of Compensation Cess. Section 8 of the Compensation Cess Act provides for the levy and collection of Compensation Cess on intra-state and inter-state supplies of specified goods and services. The cess is imposed based on value, quantity, or other criteria, as recommended by the GST Council, and is meant to compensate states for revenue losses post-GST implementation.

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