The Gujarat High Court has brought clarity-seeking relief to exporters by referring a crucial matter to the GST Council. The issue at hand is whether a Compensation Cess at 160% is applicable on goods supplied to merchant exporters, especially when these goods are intended for exports.
The petitioner, M/s Sopariwala Export Pvt. Ltd., is a manufacturer of branded tobacco products classified under HSN code 24039910. These goods attract 28% GST and 160% Compensation Cess. The dispute arose when the petitioner supplied goods to merchant exporters at a concessional GST rate of 0.1% under Notifications No. 40/2017 and 41/2017 but did not pay the Compensation Cess. The department contested this, initiating recovery proceedings.
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“There is no notification issued by the Central Government or State Government under the Compensation Cess Act, and therefore, the assessee is made liable to pay Compensation Cess at normal rate i.e., 160%,” the court noted.
The core argument by the petitioner was that their supplies to merchant exporters qualify as export supplies and should be treated at par with zero-rated exports. They emphasised that these goods were shipped directly to ports, not stored locally, and followed all compliance conditions under the GST regime. Further, the GST Council had clearly recommended a concessional rate of 0.1% for such transactions to avoid working capital blockage for exporters.
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The respondents, however, argued that no exemption notification under the Compensation Cess Act exists. They also cited a Supreme Court judgment in Unicorn Industries v. Union of India to argue that exemptions under GST notifications do not automatically extend to Compensation Cess.
"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," the bench remarked.
The High Court also considered that Compensation Cess is designed to compensate states for GST-related revenue loss. However, in this case, since the goods are exported and refunds are applicable, no such loss arises.
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“The Compensation Cess Act was enacted to compensate States for loss of revenue due to GST implementation. Where such tax is ultimately refundable on export, the rationale for levy itself collapses,” the court stated.
The court observed that both the CGST and IGST were subject to exemption through formal notifications, but the Compensation Cess was left ambiguous. It found merit in the petitioner’s argument that denying exemption only for Compensation Cess while granting it for other taxes is discriminatory and possibly violates Article 14 of the Constitution.
Ultimately, the Gujarat High Court referred the matter to the GST Council to examine whether the same exemption structure (limiting tax to 0.1%) should also apply to Compensation Cess for goods supplied to merchant exporters. This, it said, would ensure consistency in the policy of zero-rating exports and reduce litigation for exporters.
Case Title: M/s Sopariwala Export Pvt. Ltd. v. Joint Commissioner, CGST and Central Excise & Ors.
Case Number: R/SPECIAL CIVIL APPLICATION NO. 6701 of 2023
Counsel for Petitioner/ Assessee: V Sridharan
Counsel for Respondent/ Department: Utkarsh Sharma
