The GST Council is considering a major shake-up of the cess regime, aiming to replace the current compensation cess with two new levies: a Health Cess and a Clean Energy Cess. This shift is planned for March 31, 2026, when the existing compensation cess is set to expire.
Why the Change?
The compensation cess was originally introduced in 2017 to cover revenue shortfalls for states after GST implementation. While it was initially meant to end in 2022, it was extended to repay loans taken during the pandemic. Now, with its legal expiry approaching, the Group of Ministers (GoM) on Compensation Cess has reached a “near consensus” on a new approach.
The Proposed New Cesses
- Health Cess: This would be applied to “sin goods” like tobacco products, aligning taxation with public health goals.
- Clean Energy Cess: This levy would target items such as coal and luxury automobiles, supporting environmental and sustainability initiatives.
The idea is to maintain a dedicated revenue stream for vital public health and environmental programs without extending the current compensation mechanism.
What Happens Next?
The GoM is expected to finalize its recommendations soon, with a GST Council meeting anticipated in late June or early July 2025, likely before the Monsoon Session of Parliament. This meeting will be crucial for deliberating the proposal.
Potential Hurdles
Despite broad support within the GoM, there are significant legal and constitutional challenges. Experts point out that the current GST law doesn’t allow for new cesses, meaning a constitutional amendment might be necessary. There are also questions about revenue distribution: if the Centre keeps all proceeds, states — which gave up their taxing powers for shared revenue — may oppose the move.
Industry’s View
Businesses are eagerly awaiting clarity on the future of the cess regime. Early announcements would help them adjust pricing, tax planning, and compliance systems well in advance, avoiding last-minute disruptions. The government faces the challenge of balancing industry expectations for the compensation cess to end with the desire to continue collecting funds for health and clean energy initiatives.
The success of these proposed cesses hinges on political consensus, constitutional backing, and a fair revenue-sharing arrangement that satisfies both the Centre and the states.