Will there be 18(4) reversal on stock in hand for items going outside the purview of Cess?

[Chitresh Gupta]

In cases where goods held as stock-in-trade subsequently fall outside the purview of Compensation Cess, would there be a requirement for reversal of input tax credit under section 18(4) of the CGST Act? Raising this question to ignite the discussion among the learned professional friends.

[Sadanand Bulbule]

Section 18(4) of the CGST Act, 2017 requires reversal of ITC when goods or services held in stock are used for purposes that nolonger remain taxable (for example, when a person switches from regular scheme to composition, or when supplies become wholly exempt).

Now, in the context of Compensation Cess: 

Cess is leviable only on notified goods (like tobacco, aerated water, coal, motor cars, etc.). If such goods subsequently go outside the purview of cess (e.g., due to amendment or exemption notification like GST-02 reforms), then the liability to pay cess on outward supply ceases from that date. However, Section 18(4) talks about “exempt supply under GST law”, not specifically about “cess”.

Once the goods remain taxable under GST (CGST + SGST/IGST), but only cess is no longer applicable, there is no requirement to reverse ITC of GST already availed.  At the same time, ITC of cess component specifically availed on stock (if any) cannot be utilized once the goods are no longer subject to cess.

Such credit becomes ineligible from that date, and as per Section 17(5)/ Rule 44, proportionate reversal of cess ITC on stock in hand would be required.

Conclusion:  

No reversal of GST (CGST/SGST/IGST) ITC is needed.  But cess credit lying in stock must be reversed (if availed) once the goods go outside the purview of compensation cess, since there will be no output cess liability to adjust it against.

Nevertheless, some of the sin goods continue to attract Compensation Cess until effective notification for its complete removal is in place. So such of the taxpayers can utilise the balance Cess as usaual till then, if any.

[Sadanand Bulbule]

I wish to add here that, you may explore the possibility of deriving benefit of judgement of the Hon’ble Bombay High Court rendered in the case of Sukraft Recycling Private Limited Versus Union of India through, The Joint Secretary, Department of Revenue, Ministry of Finance New Delhi, Assistant Commissioner of Central GST, Division-I, Goa, Additional Commissioner (Appeals) Central Tax, Goa. - 2025 (9) TMI 470 - BOMBAY HIGH COURT held that unutilized Input Tax Credit (ITC) of compensation cess paid on raw material (coal) used in the manufacture of Kraft Paper exported as a zero-rated supply is refundable.

Further you may also refer the CBIC Circular No.125/44/2019-GST dated 18/11/2019 as regards to refund of unutilised Compensation Cess.

It is also advisable to seek proper clarification from the GoI/CBIC in this regard.

[Sadanand Bulbule]

Here is the distinction beware Tax  and Cess; 

A tax is a general compulsory contribution to State revenue, while a cess is a tax earmarked for a specific purpose, and courts (Sri Lakshmindra, K. Srinivasan, Mohit Minerals) have consistently upheld this distinction.

So “Conpensation Cess” cannot be equated with CGST/SGST/IGST. 

You may argue on these lines  not to deny refund of unutilised Cess. 

[K.lakshmipati rao]

Thank you, Mr. Sadanand Bulbule ji, for sharing very useful information, @ 2 & 3 above.

[Chitresh Gupta]

Thanks a lot Sadanand ji for the reply. In my opinion, there can be two possible views;

View 1: As the GST Council deletes compensation cess on certain categories like cars, the cess component of ITC for unsold stock as of the implementation date may have to be reversed, since the goods become "cess exempt". Cess ITC can never be used to pay off base GST liability—it is ring-fenced for compensation cess. Sectors impacted, especially relevant for automotives and carbonated beverages.

View 2: As per section 2(47) of the CGST Act,  “exempt supply” means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax.

But section 18(4) uses the words, ‘where the goods or services or both supplied by registered person become wholly exempt, he shall pay an amount…………’

Now, there may be a possible interpretation that the goods wholly exempt from tax does not include goods liable to Nil rate of tax as the definition of exempt supply refers to these to two separately.

Thus, although the Cess may not be utilised but there is no requirement to reverse the Cess credit immediately.

[Sadanand Bulbule]

I have still my own reservations on this issue:

It may be contended that Section 18(4) of the CGST Act refers to supplies becoming “wholly exempt,” whereas Section 2(47) separately identifies both “wholly exempt” and “nil rated” supplies within the definition of exempt supply.

On this basis, one could argue that deletion of Compensation Cess merely renders the supply nil-rated for cess purposes alone and does not amount to making the goods “wholly exempt,” thereby not attracting the reversal requirement under Section 18(4).

If this interpretation is adopted, reversal of Compensation Cess ITC may not be immediately warranted, though such credit would remain dead credit or  unutilisable in practice.

Therefore in the absence of  any specific relaxation from the GST Council/CBIC, this is going to be  a litigation-prone view.  So my appeal to the GST Council/CBIC is to come out with a clear picture on this unlcear issue.

[Sadanand Bulbule]

Another big hitch is the proviso to Section 11(2) of the GST (Compensation to States) Act which mandates as under:

Provided that the input tax credit in respect of cess on supply of goods and services leviable under section 8, shall be utilised only towards payment of said cess on supply of goods and services leviable under the said section.

So such dead credit of Cess is not transferable to the ITC ledger of CGST/SGST/IGST in view of Section 11(2) supra.

[K.lakshmipati rao]

Yes, Mr. Sadanand Bulbule ji, the GST Council/CBIC is to come out with a clear picture on this unclear issue.

I wish to draw your attention to 56th GST Council FAQ: 

SL. No.38-

Why is 40% rate referred to as a ‘special rate’? What is the basis for subjecting goods to special rate? The special rate is applicable only on few select goods, predominantly on sin goods and few luxury goods and therefore is a special rate. 

Most of these goods attracted Compensation Cess in addition to GST. Since it has been decided to end the Compensation Cess levy, the Compensation Cess rate is being merged with GST so as to maintain tax incidence on most goods. On other goods and services, the special rate has been applied as these were already attracting the highest GST rate of 28%.

[Sadanand Bulbule]

Dear Sir

The moot question that needs to be answered is, what is the fate of unutilised Compensation Cess in view of GST-02 reforms? 

[Chitresh Gupta]

In my view, since there is no clarity on reversal of  unutilised Compesnation Cess. It is better to not to reverse the same as no interest can be charged since not utilised. Further, the Government may come out with some clarification or relaxation scheme in future.

Regards

[Sadanand Bulbule]

Dear Gupta ji

You have given sagacious suggestion. Better to wait for Government clarification. No hurry till then.

AI Summary

Compensation cess credit treatment: cess ITC may require reversal when cess is removed; GST ITC remains utilisable. Removal of Compensation Cess does not trigger reversal of CGST/SGST/IGST input tax credit on stock-in-hand because underlying GST remains payable; however, any input tax credit specifically attributable to Compensation Cess becomes unutilisable when cess liability ceases and must be reversed or refunded under applicable cess-specific rules and refund mechanisms, subject to competing interpretations and administrative clarification.