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Informist, Friday, Jul. 24, 2026

 

NEW DELHI – States are net gainers from the move to discontinue the goods and services tax compensation cess in February and impose excise duty on sin goods like tobacco products, State Bank of India Chief Economist Soumya Kanti Ghosh said in a report Friday. According to him, states will earn around INR 1.43 trillion more in 2026-27 (Apr-Mar), compared with the last year, due to the new excise duties. 

 

"Under the revised framework, with the compensation cess discontinued and additional excise duty introduced, states' combined share from GST and basic excise duty is projected to increase to nearly INR 19.1 trillion in FY27 from INR 17.7 trillion in FY26," Ghosh said. 

 

According to him, after the discontinuation of the compensation cess, it is being argued by some researchers that the states' share in the overall GST kitty has been reduced and states are now facing losses in the range of INR 150 billion to INR 200 billion annually. "We believe that this argument is completely fallacious," he said. 

 

The GST compensation cess was introduced to bring states on board to adopt the GST regime in 2017. The Centre had promised to protect 14% revenue growth for states for the first five years by levying a compensation cess on certain luxury goods, including motor vehicles, expensive motorcycles, caffeinated beverages, and sin goods such as tobacco items and pan masala.

 

Initially set to expire in June 2022, the cess was extended until March 2026 to repay INR 2.69 trillion loans taken by the Centre to partly bridge the revenue shortfall of states during the COVID-19 pandemic. Eventually, the compensation cess levy expired on Feb. 1, after the loans were repaid. Effective the same date, the government imposed a higher excise duty on cigarettes over and above the 40% GST. It has also imposed a higher duty on pan masala. The new duty structure on these items ensures that the overall tax incidence on such sin items does not come down in the post-compensation era.

 

The entire mechanism was part of the GST Council's decision to overhaul the indirect tax structure in September last year. It had slashed the number of GST rate slabs to three--5%, 18%, and 40%, from rates four earlier. The Council had introduced the new GST rate of 40% on luxury goods to subsume the GST compensation cess that some of the items in the now-discontinued 28% GST bracket attracted.

 

Ghosh argued that under the old GST arrangement, states received compensation cess share plus State GST, plus 40% of Integrated GST and Central GST, as per the devolution formula. From FY27, however, the compensation cess is out of the picture and excise duty comes under the central divisible pool of taxes. This means, under GST framework, states will collect State GST plus 40% of Integrated GST and Central GST, and another 41% of additional excise duty on sin goods. 

 

"Additionally, the impact of the revised tax structure from 28% to 40% on certain commodities such as pan and tobacco indicates that, for an intra-state supply with a taxable value of INR 100, states earlier received INR 19.74 under the 28% GST regime. Following the increase in GST on specified demerit goods from 28% to 40%, the states' share rises to INR 28.20. Thus, the revised structure results in an additional INR 8.46 accruing to states compared with INR 3.54 for the Centre, clearly indicating that the benefits of higher taxation accrue to states as well," he explained.

 

"Thus, the argument that states are in loss is completely flawed, rather GST rationalisation has increased the pie and states are a beneficiary of this larger pie," the economist said. 

 

Going forward, Ghosh said that he expects a rebound in the GST collections and yearly growth in the range of 8–9%. "...the moderation in collection is due to rate rationalisation, which is on expected lines," he said. As per the Budget estimates, the government's GST collections in FY27 are projected to grow 6.3% on year. Collectively, in the first three months of FY27, GST collections grew 8.4% to INR 6.317 trillion.  End

 

Reported by Priyasmita Dutta

Edited by Akul Nishant Akhoury

 

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