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TMI BlogGujarat HC Ruling on Compensation Cess Levy on Tobacco Exports: A Case for Exemption for Merchant Exporters"X X X X Extracts X X X X X X X X Extracts X X X X ..... Gujarat HC Ruling on Compensation Cess Levy on Tobacco Exports: A Case for Exemption for Merchant Exporters" X X X X Extracts X X X X X X X X Extracts X X X X ..... ala Export Pvt. Ltd., manufacture branded tobacco products (scented/flavoured chewing tobacco) and sell them to merchant exporters for export. The issue arose regarding the levy of GST Compensation Cess at the rate of 160% on the supply of goods to these merchant exporters. The petitioners contended that the export of goods should be zero-rated for GST purposes under Section 16 of the IGST Act. Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, they were being charged the Compensation Cess at the normal rate of 160%. Legal Provisions Involved: * Section 16 of the IGST Act: Zero-rated supply for exports. * Section 54(3) of the GST Act: Refund of tax paid on export. * Section 11 of the Compensation Cess Act: Applicability of provisions of CGST and IGST Act for levy of Compensation Cess. * Notification No. 40/2017 and 41/201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7: Exemption for export supplies under GST and IGST with reduced tax rates. Key Issues Raised: * Whether the petitioners are liable to pay Compensation Cess at the normal rate of 160% on the supply of goods to merchant exporters, even though the goods are being exported. * Whether the absence of a specific notification exempting Compensation Cess for export supplies causes working capital blo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ckage and is a revenue neutral exercise. Court's Observations: 1. Export Supply & Zero Rating: * The supplies made by the petitioners to merchant exporters were clearly exports under Section 2(5) of the IGST Act. * Such exports are zero-rated supplies, meaning that they should be exempt from GST, and the petitioners are entitled to avail refunds as per the provisions of the IGST Act. 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Levy of Compensation Cess: * The Compensation Cess is levied at the normal rate of 160% on tobacco products as per the Compensation Cess Act. * While the supply of goods is zero-rated under the IGST Act, the Compensation Cess Act has not issued any specific exemption notification for exports or for supplies to merchant exporters. * This creates an issue where the petitioner has to pay the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompensation Cess upfront, which will be refunded to the merchant exporter later. This leads to working capital blockage for the manufacturer/exporter. 3. Revenue Neutral Nature of the Cess: * Although the Compensation Cess is paid by the petitioners at the normal rate, it is refunded to the merchant exporter, which ultimately makes the entire transaction revenue-neutral. The petitioners are eff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectively paying the cess, which is reimbursed later, thus creating a cash flow issue. * The Court noted that there is no substantive loss of revenue, but this levy still causes inconvenience due to the working capital blockage. 4. Need for Exemption: * The Court pointed out the absence of any exemption notification for the Compensation Cess on exports or supplies to merchant exporters, simila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to the exemptions granted under Notifications No. 40/2017 and 41/2017 for GST and IGST. * The GST Council was urged to consider granting an exemption from the Compensation Cess on supplies made to merchant exporters, as it would help avoid the unnecessary working capital blockage. Court's Ruling: * The supplies by the petitioners to the merchant exporters are rightly classified as expor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of goods, making them zero-rated supplies under Section 16 of the IGST Act. * While the Compensation Cess is applicable as per the normal rate (160%) due to the absence of a specific notification under the Compensation Cess Act, the payment of Cess causes working capital blockage and is ultimately revenue-neutral. * The Court remanded the matter and referred the issue to the GST Council to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecide whether exemption from Compensation Cess should be granted for goods supplied to merchant exporters, similar to the exemptions provided for GST and IGST. * The impugned action of the authorities to levy Compensation Cess at 160% on supplies made by the petitioners to merchant exporters was put on hold pending further clarification and action by the GST Council. Conclusion: * The petitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ners' goods supplied to merchant exporters for export qualify as zero-rated export supplies under Section 16 of the IGST Act. * The Compensation Cess at the rate of 160% on such supplies leads to working capital blockage, even though the Cess is ultimately refunded to the merchant exporter. * The Court has referred the matter to the GST Council for consideration of exemption from Compensat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion Cess for exports, ensuring that there is no unnecessary cash flow problem for manufacturers and exporters. * Petition allowed by way of remand. Implications for Exporters: Exporters of goods, especially those dealing with compensatory cess on goods like tobacco products, may face liquidity issues due to upfront cess payment. The matter now lies with the GST Council, which might introduce a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppropriate notifications or exemptions to mitigate such financial blockages. X X X X Extracts X X X X X X X X Extracts X X X X
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