The Gujarat High Court has instructed the GST Council to look into removing the high 160% compensation cess on tobacco products when they are exported by merchant exporters
Nidhi | May 13, 2025 |
Gujarat High Court Criticises 160% Tax on Tobacco Exports
In a major decision, the Gujarat High Court has instructed the GST Council to look into removing the high 160% compensation cess on tobacco products when they are exported by merchant exporters. The court also told the Director General of Goods and Services Tax Intelligence (DGGI) to stop charging this heavy cess for now.
A two-judge bench, led by Justice Bhargav Karia and Justice D N Ray, reviewed petitions from two Gujarat-based manufacturers who faced a 160% compensation cess on scented tobacco. These goods were meant for export through merchant exporters and should be taxed at just 0.1% GST.
However, the DGGI asked for huge money in compensation cess for products exported between 2017 and 2021. During the investigation in Surat, officials came to know that the companies had paid the 0.1% GST but not the compensation cess. The department argued that there was no exemption from this cess and claimed the goods did not qualify as exports under the law.
The manufacturers disagreed with the tax department’s view, and they highlighted that the Tobacco and Tobacco Product Manufacturers Association had asked the GST Council and the CBIC Chairman back in February 2023 for the clarification. However, they did not receive any response on the matter.
The petitioners also argued that while the 160% compensation cess is for tobacco sold within India, it should not apply to goods for export. They claimed they were not required to pay this cess on goods supplied to merchant exporters.
After hearing the cases of both parties, the High Court observed that despite manufacturers paying the 160% cess, merchant exporters could still claim refunds under the IGST and GST Acts. As per the SC order, such payments are known as “revenue neutral” and unsustainable.
The court also found a regulatory loophole, as while there were notifications for GST levy, both the Central and State Governments had released similar notifications under the Compensation Cess Act. Because of this, exporters ended up being charged the full 160% compensation cess on goods meant for export.
The court was concerned about working capital that was held up. As per the GST and IGST rules, the bench asked the GST Council to provide exemption from the cess. Since exported items aren’t taxed, this would free up working capital for exporters and manufacturers, including EOUs, by removing the need to pay a cess that would be refunded later.
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