GST Council may replace compensation cess with 2 new levies: Report
The proposal is expected to be taken up by the Group of Ministers (GoM) on Compensation Cess, chaired by Minister of State for Finance Pankaj Chaudhary. Sources quoted in the report said that a meeting of the GoM is likely to be scheduled soon, and the GST Council may deliberate on the matter before the Monsoon Session of Parliament.
The compensation cess was introduced to offset states' revenue losses following the rollout of GST in July 2017. Initially intended to end in June 2022, the cess was extended to help repay loans raised to cover the compensation gap during the pandemic. It is now scheduled to legally end on March 31, 2026.
The GoM has reportedly reached a near-consensus on replacing the current cess with two separate levies. The Health Cess would be applicable on sin goods such as tobacco products, while the Clean Energy Cess would target items like coal and high-end automobiles. These proposals, sources said, reflect the government's emphasis on public health and environmental priorities. 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.
Most states are said to be supportive of the move, especially since it targets non-essential and harmful goods. However, the GoM is expected to meet once more before formally submitting its recommendations to the Council.
Despite broad agreement within the GoM, legal and constitutional issues could complicate the rollout. The current GST framework does not permit the introduction of new cesses, and any fresh levy would likely require a constitutional amendment. Tax experts quoted by CNBC-TV18 noted that the compensation cess was allowed only as a transitional arrangement. Introducing new cesses, they argue, could violate the fundamental GST principle of 'one nation, one tax.'
Concerns have also been raised about how revenue from the proposed cesses would be distributed. One tax expert told CNBC-TV18 that if the Centre retains the entire proceeds, states may oppose the plan, particularly since they had surrendered their individual taxation powers in exchange for a shared revenue system.
The GoM on Compensation Cess was set up by the GST Council in September 2024 to chart a post-cess roadmap. It was initially expected to submit its report by the end of December 2024, but the timeline was extended. The full GST Council, which includes the Union Finance Minister and finance ministers of all states, is now expected to meet in late June or early July. Apart from the cess issue, the agenda may include discussions on GST rate rationalisation and steps to simplify compliance.
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