Published 4 October 2026
Compensation cess was levied from 01.07.2017 under the Goods and Services Tax (Compensation to States) Act, 2017 on luxury and demerit goods such as tobacco products, aerated drinks, large motor cars and coal. It funded compensation to States for revenue lost on the move to GST and, after 2022, the repayment of loans taken for that purpose. It has now ended. This guide explains what replaced it, with before-and-after examples. Figures are illustrations.
How the cess ended
- 22.09.2025. Compensation cess was abolished on all goods except tobacco and pan masala products. Most goods that bore it moved to a new 40% GST rate (for example aerated drinks and large motor cars); others moved to 18% (for example coal).
- 01.02.2026. The remaining cess on cigarettes, other tobacco products and pan masala ended. These goods now bear GST at 40%, together with central excise duty on tobacco products and a Health Security se National Security Cess on pan masala, under laws passed in December 2025. Bidis bear GST at 18%.
G.1 — Aerated drinks
Facts. A Mumbai bottler supplies aerated drinks worth Rs. 50,000 to a Delhi distributor.
- Before 22.09.2025: IGST 28% (Rs. 14,000) plus compensation cess 12% (Rs. 6,000) — Rs. 20,000.
- From 22.09.2025: IGST 40% — Rs. 20,000, with no cess.
Result. The total burden is unchanged; it is now one tax, and the distributor's credit is no longer split between IGST and a separately ring-fenced cess credit.
G.2 — Coal
Facts. A coal company supplies 1,000 tonnes of coal worth Rs. 50,00,000 to a cement plant in the same State.
- Before 22.09.2025: GST 5% (Rs. 2,50,000) plus cess of Rs. 400 per tonne (Rs. 4,00,000) — Rs. 6,50,000.
- From 22.09.2025: GST 18% — Rs. 9,00,000 (CGST + SGST), with no cess.
- The plant takes credit of the GST and uses it against tax on its own supplies; the cess credit it formerly received could be used only to pay cess.
Result. A higher headline rate, but fully usable credit for a manufacturer making taxable supplies.
G.3 — Large motor cars
Facts. A dealer sells a large car for Rs. 40,00,000 (excluding tax).
- Before 22.09.2025: GST 28% plus compensation cess at the rate for the car's category.
- From 22.09.2025: GST 40% — Rs. 16,00,000, with no cess.
Result. For many large cars the combined rate fell. See example C.1 for an imported car.
G.4 — Online money gaming
- From 01.10.2023, supplies of online money gaming were taxed at 28% on the amount paid or deposited with the supplier (Rule 31B), not on each bet.
- From 22.09.2025, online money gaming, betting and gambling are taxed at 40%.
- The Promotion and Regulation of Online Gaming Act, 2025 prohibits offering online money games; it is in force from 01.05.2026.
What remains relevant
- Demands, refunds and appeals for periods up to the end of the cess continue under the Compensation Act.
- Compensation cess credit could be used only to pay compensation cess.