Compensation, Cess and State Finances

States were promised compensation for revenue lost after GST for five years, funded by a cess on luxury and sin goods, and the arrangement created tensions.

States feared losing revenue.

The promise

States were guaranteed 14 per cent yearly growth in revenue for five years after 2017.

The cess

A compensation cess on luxury and sin goods funded the payments.

The pandemic gap

When collections fell in 2020, there was a shortfall, and the Centre let states borrow, with the cess extended to repay it.

After

The period ended in 2022, and states now depend on their share of GST growth.

A shortfall

A state finds its GST revenue lower than promised and asks for help.

Ignoring state finances in GST debates

States rely on this revenue.

Key takeaways

States were guaranteed growth for five years.
A cess funded compensation.
The pandemic caused a gap.
The period ended in 2022.