Can Merchant Exporters Get Relief from GST Compensation Cess?
The Gujarat High Court recently nudged the GST Council to take a closer look at a long-standing demand — exempting merchant exporters from compensation cess. This direction could reshape the compliance burden on India’s export ecosystem.
Let’s break it down.
What Is Compensation Cess?
- It’s a cess levied under Section 8 of the GST (Compensation to States) Act, 2017
- Applicable on specified luxury and sin goods (e.g., coal, tobacco, cars)
- Collected by the Centre to compensate states for GST revenue loss
- Payable in addition to GST where applicable
Current Issue Faced by Merchant Exporters
Despite zero-rating for exports:
- Merchant exporters supplying specified goods to overseas clients often pay compensation cess upfront
- Refund is not always available — leading to blocked working capital
- There’s no specific exemption notification for such cases unlike concessional GST rate schemes (e.g., Notification No. 41/2017-IGST)
What Did Gujarat HC Say?
In Essar Steel India Ltd. v. Union of India, the Gujarat HC did not grant direct relief but made a strong observation:
“The GST Council may consider the question of exemption from levy of compensation cess on supply to merchant exporters and take a decision.“
This puts the ball in the GST Council’s court — signaling possible future relief.
Legal References You Should Know
- Section 11 of CGST Act – empowers government to grant exemptions on recommendations of the GST Council
- Section 8 of Compensation Act – empowers levy of cess on notified goods
- Notification No. 41/2017-IGST (Rate) – allows 0.1% IGST for merchant exporters but does not cover cess
Expert View: Is Exemption Practical?
According to indirect tax experts:
“A blanket exemption may not align with the compensation cess framework unless amended legislatively. However, a refund-based mechanism or special notification can provide interim relief.“
Why This Matters
- India aims to boost exports – easing tax burden on exporters is key
- Merchant exporters operate on thin margins – blocked refunds hurt competitiveness
- Policy inconsistency between GST and cess rules adds legal complexity
Possible Future Scenarios
| Scenario | Outcome |
|---|---|
| GST Council issues exemption | Merchant exporters won’t pay cess upfront |
| Refund-based solution | Cess paid gets refunded with simplified process |
| No action taken | Status quo continues, legal challenges may rise |
FAQs
Q1. Is there a current exemption for merchant exporters from compensation cess?
No. There is no specific notification granting this exemption.
Q2. Can compensation cess be claimed as refund?
Only in limited export scenarios and subject to conditions. It’s not automatic like IGST.
Q3. What’s the Gujarat HC’s stand?
The Court urged consideration by the GST Council — it didn’t mandate an exemption.
Conclusion
The Gujarat High Court’s remarks on compensation cess relief for merchant exporters open the door for policy correction. While no immediate exemption exists, exporters and consultants should closely track GST Council decisions. A change here could significantly ease cashflow pressures and boost India’s export competitiveness.
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Summary
Gujarat High Court urged the GST Council to consider exempting merchant exporters from GST compensation cess. While not a ruling, this observation could lead to policy changes. Merchant exporters currently face cess without clear refunds. Relief may come through a future Council notification.