GST Council Considers Health and Clean Energy Cess to Replace Compensation Levy by 2026: Report

The GST Council is reportedly planning to revamp its cess framework by introducing two new levies—a Health Cess and a Clean Energy Cess—once the existing compensation cess ends on March 31, 2026, according to a report by CNBC-TV18 citing government sources.

The proposal is expected to be examined by the Group of Ministers (GoM) on Compensation Cess, headed by the Minister of State for Finance, Pankaj Chaudhary. As per the report, the GoM is expected to convene soon, with the GST Council potentially discussing the matter before the Monsoon Session of Parliament.

Compensation Cess to End by March 2026

The compensation cess, introduced in July 2017 to compensate states for revenue loss after GST rollout, was initially meant to expire in June 2022. However, the Centre extended the levy to help repay pandemic-era loans raised to fill the compensation gap. It is now legally scheduled to end on March 31, 2026.

Government Proposes Two New Levies

Health Cess on Sin Goods

As per the report, the proposed Health Cess would apply to harmful or sin goods such as tobacco products, reflecting the government's focus on public health.

Clean Energy Cess for Sustainability

The second proposed levy—Clean Energy Cess—would be applied on coal, high-end automobiles, and other items linked to environmental impact, in line with the Centre’s clean energy and climate priorities.

“These proposals… reflect the government’s emphasis on public health and environmental priorities,” said sources quoted in the report.

From Compensation to Social Responsibility

The new cesses would move away from revenue compensation for states and instead focus on sustainable and socially conscious taxation. The idea is to maintain a cess-based revenue stream while aligning it with broader national goals.

“The idea is to continue generating revenue through a cess-based model, but with a sharper focus on social and sustainability goals, rather than extending the compensation mechanism designed for states.”

Support and Legal Concerns

States Back the Proposal

The report notes that most states support the plan, especially as it targets non-essential and harmful goods. However, the GoM is likely to meet again before submitting its final recommendation.

Constitutional Challenges

Despite near-consensus, legal and constitutional hurdles loom large. Experts warn that the existing GST structure doesn't allow new cesses without a constitutional amendment.

“Introducing new cesses… could violate the fundamental GST principle of ‘one nation, one tax,’” said tax experts.

Concerns also revolve around revenue-sharing mechanisms. If the Centre retains all collections, states may oppose the move, having given up their taxation rights for a shared structure.

GST Council Meeting Likely Before Monsoon Session

Established in September 2024, the Group of Ministers (GoM) on Compensation Cess was originally scheduled to present its report by December that year. However, the deadline was extended. The complete GST Council—comprising the Union Finance Minister along with finance ministers from all states—is now anticipated to convene in late June or early July 2025.

Other Key Topics on Agenda

In addition to the cess replacement, the Council may also take up:

• GST rate rationalisation

• Simplification of compliance

Conclusion

As the March 2026 deadline for the GST compensation cess approaches, the proposal to introduce a Health Cess and Clean Energy Cess signals a significant shift in India’s tax policy. This transition reflects the government's intent to align fiscal tools with public health and environmental goals, moving beyond the temporary state-compensation model that followed GST's implementation in 2017.

While most states are reportedly on board, the road ahead is not without challenges. Constitutional amendments may be required, given that the GST framework does not currently allow for new cesses. Additionally, the mechanism for revenue sharing between the Centre and states could become a contentious issue if not clarified.

Still, the move opens up a dialogue on how India can use taxation to promote sustainable and socially responsible consumption. The upcoming GST Council meeting in June/July 2025 will be crucial in determining the future course of these proposed levies.