New Delhi, India — Despite widespread concerns regarding state finances after the discontinuation of the Goods and Services Tax (GST) compensation cess, a recent report by SBI Research projects a significant fiscal gain for Indian states. The report estimates that states will collectively be better off by approximately ₹1.43 lakh crore in the fiscal year 2027 (FY27), thanks to robust GST collections and a revised revenue-sharing framework.
The End of an Era: GST Compensation Cess
The GST compensation cess was initially enacted under the GST (Compensation to States) Act, 2017. Its primary purpose was to temporarily offset any revenue shortfalls states might experience following the nationwide implementation of the GST. Primarily levied on demerit goods like tobacco and pan masala, this cess was always intended as a transitional measure, not a permanent revenue stream. It officially expired on February 1, 2026, having fulfilled its seven-year mandate.
The withdrawal of the cess sparked debate among economists and policymakers. The central government subsequently introduced an Additional Excise Duty (AED) on specific products through amendments to the Central Excise Act. Unlike the compensation cess, which was entirely transferred to states, the AED is now integrated into the Basic Excise Duty (BED) and shared with states based on the Finance Commission's devolution formula. This change led some analysts to predict potential annual losses of ₹15,000-20,000 crore for state governments.
SBI Research's Counter-Argument: A Broader Fiscal Perspective
SBI Research, however, argues that such pessimistic forecasts overlook the broader fiscal dynamics. Their latest "Ecowrap" report contends that focusing solely on the cessation of the compensation cess ignores substantial gains from other tax adjustments and increased collections. The report's projections indicate that the combined share of states from GST and Basic Excise Duty is set to climb to around ₹19.1 lakh crore in FY27, a significant increase from ₹17.7 lakh crore in FY26. This translates directly into the estimated net gain of ₹1.43 lakh crore.
How States Stand to Gain
- Increased Overall Tax Pool: States will benefit from a larger national tax pool, driven by consistently higher GST collections across the country.
- Revised Duty Sharing: While states no longer receive 100% of the former compensation cess, the inclusion of the Additional Excise Duty into the divisible pool ensures they still receive a share, albeit through a different mechanism.
- Higher GST Rates on Demerit Goods: The GST rate on specified demerit goods has been increased from 28% to 40%. This adjustment significantly boosts states' share of tax revenue from these products. For an intra-state supply valued at ₹100, states now receive ₹28.20, a notable increase from the previous ₹19.74, while the Centre's share sees a comparatively smaller rise.
Anticipated GST Growth and State Revenue Trends
SBI Research anticipates a strong rebound in GST revenue growth following a moderation observed after the September 2025 GST rate rationalisation. Overall GST revenue growth had slowed to 5.6% in FY26, down from 9.4% in FY25. However, in the first quarter of FY27, year-on-year GST growth stood at 1.5% when compared against collections that still included the compensation cess. Excluding the cess impact, the growth rate for Q1 FY27 is a robust 8.4%. Looking ahead, SBI projects annual GST collections to expand by 8-9%.
Furthermore, the report notes that states' State GST (SGST) revenues have demonstrated an average growth rate of nearly 13% in the post-GST era. This compares favorably to the approximately 8% annual growth seen in the taxes subsumed under GST prior to its introduction. This sustained healthy growth in SGST indicates that states are maintaining robust revenue streams even without the direct compensation support, suggesting that the end of the GST compensation cess may be less disruptive than initially feared by critics.