Goods and Services Tax (GST)

Issue of GST compensation to states


From UPSC perspective, the following things are important :

Prelims level : Provision of compensation to states under GST

Mains level : Paper 3- Issues of GST compensation to states.

The article analyses the issue of GST compensation to states under GST regime for five years and how this has turned to be contentious issues after the economic disruption caused by Covid-19.

The basis for compensation

  • Under Goods and Services Tax (GST) regime the Centre would make good the loss in the first five years if States faced revenue deficits after the GST’s introduction.
  • States sacrificed their constitutionally granted powers of taxation in the national interest.

GST compensation cess

  • To pay the compensation to states, GST compensation cess was introduced.
  • When the GST compensation cess exceeded the amount that had to be paid to States, the Central government absorbed the surplus.
  •  Now, the economy has slowed down dramatically and the resources raised are insufficient.
  • The Centre is raising questions about whether it is legally accountable to pay compensation.
  • The constitutional framework that ushered in the GST does not provide an escape clause for ‘Acts of God’.

Way forward

  • As stated by the Secretary of the GST Council in the tenth meeting, the central government could raise resources by other means for compensation and this could then be recouped by continuing the cess beyond five years.
  • Monetary measures are the monopoly of the central government.
  • Even borrowing is more efficient and less expensive if it is undertaken by the Central government.
  • As equal representatives of the citizens State governments expected the Centre to demonstrate empathy and provide them relief through the Consolidated Fund of India.


Central government should consider the legal provision in the GST regime and act in the spirit of cooperative federalism.

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