Key Highlights
- GST Council plans to replace compensation cess with separate Health Cess and Clean Energy Cess post-March 2026.
- Experts warn introducing new cesses complicates GST’s simplicity, requiring constitutional amendments and clear revenue-sharing norms.
According to reports, the GST Council is considering a major overhaul of the current cess structure, including the introduction of a Health Cess and a Clean Energy Cess after the existing compensation cess expires in March 2026.
The proposal is expected to be considered by the Compensation Cess Group of Ministers (GoM), which is chaired by Minister of State for Finance Pankaj Chaudhary. According to reports, a GoM meeting is likely to be scheduled soon, and the GST Council may deliberate on the issue before Parliament's Monsoon Session.
The compensation cess was imposed to offset states' revenue losses following the implementation of GST in July 2017. Originally set to expire in June 2022, the cess was extended to help repay loans raised to cover the compensation gap during the pandemic. It is now set to legally expire on March 31, 2026.
The GoM has reportedly reached a near-consensus on replacing the current cess with two distinct levies. While the Clean Energy Cess would target coal and luxury cars, the Health Cess would target sin goods like tobacco products. Sources claim that these proposals demonstrate how the government prioritizes environmental and public health. The plan is to continue generating revenue through a cess-based model, but with a stronger emphasis on social and environmental goals, rather than extending the compensation mechanism designed for states.
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Most states are said to support the move, which targets non-essential and harmful goods. Before formally presenting its recommendations to the Council, the GoM is anticipated to convene once more.
Although there is broad consensus within the GoM, implementation may be hampered by legal and constitutional concerns. New cesses cannot be introduced under the current GST framework, and any new levy would probably require a constitutional amendment. According to tax experts interviewed by, the compensation cess was only allowed as a transitional measure. They argue that implementing new cesses would violate the fundamental GST principle of "one nation, one tax."
Concerns have also been raised about how the proposed cesses' revenues will be distributed. One tax expert told that if the Centre keeps the entire proceeds, states may oppose the plan, especially since they gave up their individual taxation powers in exchange for a shared revenue system.
The GST Council established the Group of Ministers on Compensation Cess in September 2024 to develop a post-cess roadmap. Originally scheduled for the end of December 2024, the report submission deadline was later extended. The full GST Council, which consists of the Union Finance Minister and the state finance ministers, is now expected to meet in late June or early July. Topics like rationalizing the GST rate and steps to facilitate compliance may be included on the agenda in addition to the cess issue.
