The GST Council is likely to consider a major restructuring of the cess regime, with plans to replace the existing compensation cess with two new levies — a Health Cess and a Clean Energy Cess — once the current cess expires on March 31, 2026, highly placed sources told CNBC-TV18 on the condition of anonymity.
The proposal is expected to be routed through the Group of Ministers (GoM) on Compensation Cess, chaired by Minister of State for Finance Pankaj Chaudhary. According to sources, the GoM is likely to take up the matter in its upcoming meeting, which is expected to be scheduled soon.
“Following the GoM’s deliberations, the GST Council will hold its meeting to deliberate on the proposal and the GST Council is likely to be convened before the Monsoon Session of Parliament,” sources added.
The compensation cess—levied to offset states’ revenue losses after the rollout of GST in July 2017—is set to lapse legally in March 2026. The cess was initially meant to end in June 2022 but was extended to repay loans taken to meet the compensation shortfall during the pandemic years.
Dual Cess Framework?
According to sources, the Group of Ministers (GoM) has reached a “near consensus” on replacing the existing GST compensation cess with two targeted levies: a Health Cess and a Clean Energy Cess.
“The Health Cess would apply to sin goods such as tobacco products, while the Clean Energy Cess would target items like coal and luxury automobiles,” a source explained, adding that these categories align with the government’s social and environmental priorities.
“The idea is to retain a cess-based revenue stream to support critical public health and sustainability initiatives, without extending the current compensation mechanism. The GoM has almost finalised its recommendations and is likely to present them to the GST Council soon,” the source added.
Most states are likely to be in favour of continuing a cess on goods deemed non-essential or harmful, aligning with public welfare goals, sources added.
However, the group is expected to hold one final meeting before formally submitting its proposals for deliberation.
Legal and Constitutional Roadblocks
Despite broad support within the GoM, legal and constitutional challenges could complicate implementation.
The GST law currently does not permit the introduction of a new cess, and any such proposal would require an amendment to the Constitution, claimed legal and tax experts who did not wish to be quoted.
Legal & Tax experts quoted above further shared that the compensation cess was allowed as a transitional measure and argue that new cesses could violate the core GST principle of “one nation, one tax.” They have also raised questions about the distribution of revenue — whether it will be shared with states or retained solely by the Centre.
“If the Centre alone receives the proceeds from the new cesses, states may oppose the move, especially since they had given up their taxation powers on the promise of an equal revenue-sharing mechanism,” a senior tax expert told CNBC-TV18.
Compensation Cess: A Recap
When GST was implemented in 2017, the Centre had assured states a 14% annual increase in revenue for five years. To make up for any shortfall, a compensation cess was levied on sin and luxury goods like liquor, cigarettes, aerated drinks, cars, and coal.
Finance Minister Nirmala Sitharaman clarified in the Lok Sabha on August 5, 2024, that the cess is now only being used to repay borrowings, and not to fund compensation payouts.
What Next?
The GoM on Compensation Cess was set up by the GST Council in September 2024 to propose a roadmap after the cessation of the existing cess. It was initially tasked with submitting its recommendations by December 31, 2024, but the timeline was extended.
The GST Council, which includes the Union Finance Minister and the finance ministers from all states, is expected to meet in June-end or early July 2025. Apart from cess-related matters, the council may also take up pending issues like GST rate rationalisation and measures to simplify compliance.
Industry Awaits Clarity
Industry stakeholders have been urging the government to provide early clarity on the future of the cess regime. Tax experts say a timely announcement will help businesses adjust pricing structures, tax planning, and compliance systems in advance, rather than making last-minute adjustments.
An tax expert says “It’s a tightrope walk for the Government between meeting the industry ask and expectation that the Compensation cessation would be discontinued after March 2026 versus still collecting the cess for purposes like health, clean energy, etc after March 2026. The industry would keenly watch out as to what the government finally does”.
While the proposed cesses may help align taxation with broader welfare goals, their success will depend on political consensus, constitutional backing, and a balanced revenue-sharing arrangement that keeps both the Centre and states on board.
