Replacing GST cess with new levies may complicate tax structure, says Deloitte’s MS Mani

Introducing a Health Cess and a Clean Energy Cess to replace the existing goods and services tax (GST) compensation cess may add layers of complexity to the indirect tax system, warns MS Mani, Partner at Deloitte India. He cautions that this move could go against the original purpose of GST, which aimed to simplify the tax framework by merging multiple levies.

With the GST Council expected to consider replacing the current compensation cess with two new levies – a Health Cess and a Clean Energy Cess – Mani and Bipin Sapra, Tax Partner at EY India, are warning of a potential setback to the goal of a streamlined tax regime.

MS Mani said that the introduction of GST was originally meant to unify various taxes and cesses into a single tax. “The cess was introduced as a temporary measure to compensate states for revenue loss, agreed to last only five years,” he said. That period was extended due to the pandemic and will now run until March 2026.

Mani cautioned that adding new cesses under the GST would be a departure from its intended structure. “We are tinkering with the architecture of something meant to simplify indirect taxes,” he said. “If we now have two more cesses, we’re complicating the system further.”

He added that the current compensation cess applies only to specific items such as automobiles and tobacco products. “If that ends and is replaced by a Health Cess and a Clean Energy Cess, we need to ask how these new cesses will work. What will the health cess fund? Will the clean energy cess apply to hybrid vehicles or all vehicles?” he asked.

Bipin Sapra, Tax Partner at EY India, echoed these concerns. “Replacing one cess with another doesn’t make sense,” he said. Sapra pointed out that the current cess collects significant revenue – around ₹1.25 lakh crore – and suggested that this could instead be used to lower or adjust existing GST rates.

He added, “The Group of Ministers’ (GoM) role could be to examine rate rationalisation rather than creating new levies. This revenue can support lowering GST slabs or bridging gaps in rate categories.”

Mani also proposed that if revenue needs to be maintained, the government could consider a slight increase in existing GST rates instead of introducing new cesses. “The law allows for a rate increase up to 40%. So moving 28% to 30% is possible without adding another layer,” he said.

He emphasised that sectors most affected by the compensation cess – namely, auto and tobacco – should be consulted. These sectors contribute significantly to GST revenues. Their feedback should be considered before finalising any changes, Mani said.

The issue is expected to be reviewed soon by the Group of Ministers on Compensation Cess, chaired by Minister of State for Finance Pankaj Chaudhary.

Source: CNBC TV18