The GST Council is contemplating a significant shift in India’s cess regime by proposing two new levies — a Health Cess and a Clean Energy Cess — to replace the Compensation Cess, which is set to expire in March 2026. This move, reported by CNBC-TV18 citing government sources, reflects the Centre’s evolving priorities toward public health and sustainability, but raises constitutional, fiscal, and political complexities.
🔍 Background: What Is the Compensation Cess?
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Introduced in July 2017 with the rollout of the Goods and Services Tax (GST).
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Meant to compensate states for loss of revenue due to GST’s implementation.
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Though it was to end in June 2022, it was extended to repay loans raised during the pandemic to cover shortfalls.
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Now legally ends on March 31, 2026.
🧾 The Proposed Overhaul
According to sources, the Group of Ministers (GoM) on Compensation Cess, chaired by MoS Finance Pankaj Chaudhary, has nearly reached consensus on a dual-cess model post-2026:
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Health Cess:
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To be levied on “sin goods” like tobacco and potentially alcohol.
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Aims to discourage harmful consumption and fund public health initiatives.
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Clean Energy Cess:
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Targets coal, high-end automobiles, and possibly other polluting goods.
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Designed to encourage clean energy transitions and environmental sustainability.
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✅ Support from States
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Most states reportedly support the idea, as it:
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Targets non-essential or harmful items.
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Continues revenue generation after the cessation of the compensation cess.
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However, states may demand a share of the revenue from these new levies.
⚖️ Constitutional and Legal Challenges
While the policy rationale is clear, implementation faces key legal roadblocks:
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GST laws currently prohibit the introduction of new cesses.
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The Compensation Cess was permitted only as a temporary measure.
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Experts warn that new levies will require a constitutional amendment, particularly:
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Amendment to Article 270 and related GST framework provisions.
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Redefinition of distribution mechanisms for such revenues.
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⚠️ “One Nation, One Tax” Debate
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The move may erode the GST principle of unified taxation by reintroducing product-specific levies.
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Critics argue it may create fragmentation, especially if goods face both GST and additional cesses.
💸 Revenue-Sharing Dispute
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States surrendered their independent tax powers (on items like tobacco, fuel, liquor) in exchange for a share of GST revenues.
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If the Centre retains all revenue from the new cesses, political opposition is likely, especially from states seeking fiscal autonomy post-2026.
🗓️ What’s Next?
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A final GoM meeting is expected soon before submitting formal recommendations.
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The full GST Council, including Union FM and state finance ministers, is expected to meet in late June or early July.
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Alongside the cess issue, the agenda may include:
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GST rate rationalisation.
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Compliance simplification.
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🧭 Conclusion
The proposed Health and Clean Energy cesses mark a shift in India’s fiscal policy — from compensating revenue loss to incentivizing public welfare and climate goals. However, balancing constitutional mandates, federal revenue-sharing, and tax simplicity will be key. The next GST Council meeting could be pivotal in deciding whether this shift proceeds smoothly — or sparks another round of Centre-State tensions.
