Exempt merchant exporters from GST compensation cess, Gujarat HC

The Gujarat High Court has urged the Goods and Services Tax (GST) Council to consider granting an exemption from the levy of Compensation Cess on the supply of goods to merchant exporters, aligning it with existing GST and IGST exemptions. A Division Bench comprising Justice Bhargav D. Karia and Justice D.N. Ray delivered this directive while disposing of a batch of petitions filed by manufacturers of branded tobacco products. The Petitioners had challenged the levy of Compensation Cess at a steep rate of 160% on goods supplied to merchant exporters, despite the primary GST rate on such supplies being restricted to 0.1% under the 22nd GST Council Meeting notifications.
The Court noted, “In view of above, when there is no recommendation by the 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, we also strongly urge the GST Council to consider the issue so as to see that there is no working capital blockage for manufacturer or exporters.”
Background of the Case
The Petitioners, engaged in manufacturing branded tobacco products under HSN 24039910, argued that their goods were either directly exported or supplied to merchant exporters at a concessional GST rate of 0.1%. These transactions complied with statutory procedures, including direct shipment from the factory to port, and all GST returns were duly filed.
However, the Directorate General of GST Intelligence (DGGI) initiated an investigation into the non-payment of Compensation Cess on such supplies, leading to issuance of summons, a show-cause notice, and a confirming order of demand under Section 74(1) of the GST Act. Senior Advocate V. Sridharan and Advocates Anand Nainawati and Paresh M. Dave represented the Petitioners, while Advocates C.B. Gupta and Utkarsh Sharma appeared for the Respondents.
Court's Observations and Decision
The High Court found merit in the Petitioners’ claim, stating that levy of Compensation Cess at 160% on goods meant for export, which ultimately results in a refund, serves no revenue purpose and leads to unnecessary working capital strain. “In view of foregoing discussion and reasons, the impugned action of levy of Compensation Cess at the rate of 160% on the supply of goods i.e. branded tobacco products by the petitioners to merchant exporters for export is required to be kept in abeyance,” the Court ruled.
The Bench further directed that no further adjudication or show-cause notices be issued on this matter until the GST Council considers the exemption issue. Petitioners were instructed to file undertakings stating they would deposit the Compensation Cess if the GST Council ultimately decides against the exemption.
The Court also stayed the operation of the impugned orders and reiterated, “We hope that GST Council shall consider the issue of such recommendation of granting exemption from payment of Compensation Cess at par with GST and IGST at the earliest so as to resolve such anomaly.”

(State Correspondent)