The GST Council is likely to deliberate a significant proposal in its upcoming meeting — replacing the existing compensation cess on goods like coal, cigarettes, and luxury items such as cars with two distinct levies: a health cess and a clean energy cess.
This transition is expected after the compensation cess is scheduled to end on March 31, 2026, according to sources familiar with the matter.
Officials and policy advisers have reportedly reached a “near consensus” on phasing out the compensation cess and introducing new levies targeted at supporting public health and clean energy initiatives.
A source privy to the ongoing discussions within the Group of Ministers (GoM) stated, “The GoM has almost finalized its recommendations. The proposals are likely to be presented to the GST Council soon for final approval.”
The GoM, headed by Union Minister of State for Finance Pankaj Chaudhary, is also examining broader issues such as tax rationalization and ease of compliance. While the GoM has not convened since December 2024, sources expect it to finalize its report ahead of the next GST Council meeting, which may be scheduled either before or during the upcoming Monsoon Session of Parliament.
Tax experts believe the proposed shift from a single compensation cess to targeted levies such as health and clean energy cesses is a step toward focused developmental funding. “This transition reflects the industry’s expectation of more efficient tax structures and better compliance,” said Saurabh Agarwal, Tax Partner at EY India.
The compensation cess, originally introduced to offset states’ revenue losses post-GST rollout in 2017, was initially intended to last until June 30, 2022. However, it was extended to March 31, 2026, to allow the central government to repay loans taken to compensate states during the pandemic years when cess collections dipped.
Experts note that the continuation of such a cess beyond 2026 is legally and politically challenging. Finance Minister Nirmala Sitharaman had also indicated during her Lok Sabha address on August 5, 2024, that an alternative structure would be necessary beyond the current sunset date.
As the industry watches for clarity on the design and implementation of the proposed health and clean energy cesses, the broader aim remains: ensuring dedicated funding for key public welfare and sustainability goals while moving toward a simplified tax regime.
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