COMPENSATION CESS ON MOTOR VEHICLES

[Dr. Sanjiv Agarwal]

The Goods and Services Tax (Compensation to States) Act, 2017 had been enacted on 12.04.2017. The Goods and Services Tax (Compensation to States) Act, 2017 (in short, Compensation Act) extends to whole of India and has come into force from 01.07.2017.

The Compensation Act comprises of 14 sections and one Schedule under sec 8 prescribing the maximum rate at which Goods and Services Tax Compensation Cess (GSTCC) may be collected for specified supplies of goods and services such as paan masala, tobacco, vehicles etc.

To generate resources to compensate States for five years (as extended) for any loss of revenue suffered by them on account of implementation of goods and services tax, a cess shall be levied on such goods, as recommended by the Goods and Services Tax Council, over and above the goods and services tax on that item.

Accordingly, there shall be levied a cess on such intra-State supplies of goods or services or both, as provided for in section 9 of the Central Goods and Services Tax Act, and such inter-State supplies of goods or services or both as provided for in section 5 of the Integrated Goods and Services Tax Act, and collected in such manner as may be prescribed, on the recommendations of the Council, for the purposes of providing compensation to the States for loss of revenue arising on account of implementation of the goods and services tax with effect from the date from which the provisions of the Central Goods and Services Tax Act is brought into force, for a period of five years or for such period as may be prescribed on the recommendations of the Council (extended upto 31.03.2026).

Cess is levied on supply of goods or services, including import of goods and services, supplies on which tax is payable on reverse charge basis under CGST Act, for a period of 5 years (extended upto 31.03.2026) w.e.f. 01.07.2017 date from which CGST is brought into force, for providing compensation to the States on account of loss of revenue due to implementation of GST.

The Goods and Service Tax (Compensation to States) Amendment Ordinance, 2017 promulgated on 02.09.2017 and which came into force from same date has amended the Schedule in the GST (Compensation to States) Act, 2017 to enable enhanced rate of Compensation Cess on motor vehicles for transport of not more than thirteen persons including the driver to 25 percent ad valoram.

When GST was introduced w.e.f. 01.07.2017, there was no separate GST Compensation cess rate for SUV cars. It was only with effect from 11.09.2017, vide Notification No. 5/2017-Compensation Cess (Rate) dated 11.09.2017, that the Government decided to levy higher GST Compensation Cess rate for SUV cars subject to the fulfillment of the conditions specified in the Notification. The Extracts of the said Notification is as follows:

S.No.	Head	Description	Rate
52	8703	Motor vehicles of engine capacity not exceeding 1500 cc	17%
52A	8703	Motor vehicles of engine capacity exceeding 1500 cc other than motor vehicles specified against entry at S. No 52B	20%
52B	8703	Motor vehicles of engine capacity exceeding 1500 cc, popularly known as Sports Utility Vehicles (SUVs) including utility vehicles. Explanation- For the purposes of this entry, SUV includes a motor vehicle of length exceeding 4000 mm and having ground clearance of 170 mm and above.	22%

A simple reading and interpretation that can be deduced from a harmonious reading of the notification together with explanation would reveal that all the 4 conditions are required to be simultaneously satisfied to attract a levy of 22% GST Compensation Cess i.e.,

1. Engine capacity above 1500 cc,
2. Vehicle to be popularly known as SUV,
3. Length more than 4000 mm   &
4. Ground clearance of 170 mm or above.

Thus, a vehicle cannot be classified under entry 52B and subjected to tax at a higher rate of cess merely on the ground that it is an SUV with engine capacity of more than 1500cc.

While the conditions in the cess Notification are specific in terms of engine capacity and length, it leads to doubts in respect of ground clearance whether such clearance should be considered in laden or un-laden condition. The GST law or notification does not provide any reference to the same.

Since, the GST law including the Rate Notification does not lay down the procedure/ method to determine the ground clearance, the reference should be drawn from The Central Motor Vehicle Rules, 1989. It is a settled position of law that if a term is not defined in the Act or the rules, then the meaning of the said term should be drawn from the Statue which governs the same subject.

Maharashtra Appellate Authority for Advance Ruling in Tata Motors - 2019 (11) TMI 421 - APPELLATE AUTHORITY FOR ADVANCE RULING MAHARASHTRA (order dated 20.09.2019) ruled that all the conditions are required to be satisfied for levying higher GST Compensation cess rate.

The appellate ruling in Tata Motors case state that any vehicles whose ground clearance in laden state are below 170 mm. will not get covered under S.No. 52B of the Cess Rate Notification i.e. Notification No. 1/2017-Compensation Cess (Rate), dated 28.06.2017.

It concluded that for the purpose of Cess @ 22% under S.No. 52B of Cess Rate Notification, the ground clearance of the vehicle is to be considered in laden condition only. Vehicle whose ground clearance in unladen condition is more than 170mm but below 170mm in laden condition, will not get covered under S.No. 52B of Cess Rate Notification.

The GST Council in its 50^th meeting held on 11 July, 2023, however, recommended otherwise that ground clearance would be considered in un-laden condition of vehicle. Moreover, it also recommended that 22% cess shall be levied on all vehicles getting covered in the defined parameters of engine capacity and length and also cover all such vehicles, by whatever name called. The earlier stipulation that the subject vehicle should be popularly known as ‘SUV’ will no longer hold good.

The press release issued after conclusion of meeting states as follows:

“It has been decided to amend the entry 52B in compensation cess notification to include all utility vehicles by whatever name called provided they meet the parameters of Length exceeding 4000 mm, Engine capacity exceeding 1500 cc and having Ground Clearance of 170 mm & above and to clarify by way of explanation that ‘Ground clearance’ means Ground Clearance in un-laden condition.”

50^th GST Council meeting held on 11.07.2023, inter alia, decided to:

• Amend entry No. 52B in compensation cess Notification No. 1/2017-CS (Rate) dated 28.06.2017 as amended by Notification No. 5/2017-CS (Rate) dated 11.09.2017.
• Compensation cess @ 22 percent shall now be levied on utility vehicles, by whatever name called (MUV, SUV….)
• Such utility vehicles should meet the following parameters :

• Length – exceeding  4000 mm
• Engine capacity – exceeding 1500 cc
• Ground clearance – 170 mm and above

• Ground clearance would mean ground clearance in an un-laden condition.
• Presently, in entry No. 52B (8703), only parameter is exceeding 1500 cc and condition that it is popularly known as sports utility vehicle including utility vehicle. This will stand modified for better clarity in scope.
• This shall be effective from a notified date on issuance of notification.

The new entry shall be substituted for existing entry 52B in compensation cess notification accordingly.