GST compensation cess is gone. Why SBI Research says states will still gain ₹1.43 lakh crore
The end of the GST compensation cess has raised concerns over states' finances, but SBI Research says the revised tax framework could actually leave states better off. The report estimates states will gain around ₹1.43 lakh crore in FY27, driven by higher GST collections and changes in revenue sharing.
- Jul 24, 2026,
- Updated Jul 24, 2026 5:20 PM IST
The discontinuation of the GST compensation cess has triggered concerns that states could lose a major source of revenue. However, a new report by SBI Research argues the opposite, estimating that states will emerge as net gainers by around ₹1.43 lakh crore in FY27 under the revised indirect tax framework.
In its latest Ecowrap report, SBI Research said the criticism surrounding the withdrawal of the compensation cess considers only one aspect of the tax changes while ignoring the gains arising from higher GST collections and the revised revenue-sharing mechanism.
Why the debate started
The GST compensation cess was introduced under the GST (Compensation to States) Act, 2017 as a temporary measure to compensate states for any revenue loss arising from the rollout of the Goods and Services Tax (GST). The levy applied mainly to demerit goods such as tobacco and pan masala and was never intended to become a permanent source of revenue for states. It officially expired on February 1, 2026 after serving its transitional purpose.
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Following its withdrawal, the Centre introduced an Additional Excise Duty (AED) on specified products through amendments to the Central Excise Act. Since AED forms part of the Basic Excise Duty (BED), it is shared with states according to the Finance Commission's devolution formula instead of being transferred entirely to them as compensation cess was.
This prompted some economists to argue that states could lose ₹15,000-20,000 crore annually.
Why SBI disagrees
SBI Research contends that such estimates overlook the broader fiscal picture.
According to its projections, states' combined share from GST and Basic Excise Duty is expected to rise to around ₹19.1 lakh crore in FY27, compared with ₹17.7 lakh crore in FY26, translating into a net gain of ₹1.43 lakh crore.
ALSO READ: GST collections for June grow 13.9% to ₹1,94,812 crore
The report argues that although states no longer receive 100% of the compensation cess, they benefit from a larger overall tax pool created by higher GST collections and the inclusion of excise duty in the divisible pool.
Old vs new system
SBI Research estimates that states may hypothetically lose around ₹21,000 crore because AED is shared according to the Finance Commission formula rather than being transferred entirely to states. However, it says this reduction is small compared with the ₹1.43 lakh crore increase in their overall GST and excise revenue.
The report also highlights that the GST rate on specified demerit goods has increased from 28% to 40%, boosting states' share of tax collections. For an intra-state supply worth ₹100, states earlier received ₹19.74, but under the revised structure they receive ₹28.20, while the Centre's share increases by a comparatively smaller ₹3.54.
MUST READ: 9 years of GST: Negative sentiment drops to near zero, businesses look to GST 2.0 reforms
GST growth expected to rebound
SBI Research expects GST revenue growth to recover after the moderation seen following the September 2025 GST rate rationalisation.
Overall GST revenue growth slowed to 5.6% in FY26, compared with 9.4% in FY25. In the first quarter of FY27, year-on-year GST growth stood at 1.5% when compared with the previous year's collections that included the compensation cess. Excluding the cess impact, growth works out to 8.4%. Going forward, SBI expects annual GST collections to expand by 8-9%.
The report also notes that states' SGST revenues have grown at an average rate of nearly 13% in the post-GST period, compared with around 8% annual growth in the taxes subsumed under GST before its introduction. According to SBI, this indicates that states continue to experience healthy revenue growth even without compensation support, making the end of the compensation cess less disruptive than critics suggest.
The discontinuation of the GST compensation cess has triggered concerns that states could lose a major source of revenue. However, a new report by SBI Research argues the opposite, estimating that states will emerge as net gainers by around ₹1.43 lakh crore in FY27 under the revised indirect tax framework.
In its latest Ecowrap report, SBI Research said the criticism surrounding the withdrawal of the compensation cess considers only one aspect of the tax changes while ignoring the gains arising from higher GST collections and the revised revenue-sharing mechanism.
Why the debate started
The GST compensation cess was introduced under the GST (Compensation to States) Act, 2017 as a temporary measure to compensate states for any revenue loss arising from the rollout of the Goods and Services Tax (GST). The levy applied mainly to demerit goods such as tobacco and pan masala and was never intended to become a permanent source of revenue for states. It officially expired on February 1, 2026 after serving its transitional purpose.
MUST READ: As GST turns nine, expectations rise for the next wave of reforms
Following its withdrawal, the Centre introduced an Additional Excise Duty (AED) on specified products through amendments to the Central Excise Act. Since AED forms part of the Basic Excise Duty (BED), it is shared with states according to the Finance Commission's devolution formula instead of being transferred entirely to them as compensation cess was.
This prompted some economists to argue that states could lose ₹15,000-20,000 crore annually.
Why SBI disagrees
SBI Research contends that such estimates overlook the broader fiscal picture.
According to its projections, states' combined share from GST and Basic Excise Duty is expected to rise to around ₹19.1 lakh crore in FY27, compared with ₹17.7 lakh crore in FY26, translating into a net gain of ₹1.43 lakh crore.
ALSO READ: GST collections for June grow 13.9% to ₹1,94,812 crore
The report argues that although states no longer receive 100% of the compensation cess, they benefit from a larger overall tax pool created by higher GST collections and the inclusion of excise duty in the divisible pool.
Old vs new system
SBI Research estimates that states may hypothetically lose around ₹21,000 crore because AED is shared according to the Finance Commission formula rather than being transferred entirely to states. However, it says this reduction is small compared with the ₹1.43 lakh crore increase in their overall GST and excise revenue.
The report also highlights that the GST rate on specified demerit goods has increased from 28% to 40%, boosting states' share of tax collections. For an intra-state supply worth ₹100, states earlier received ₹19.74, but under the revised structure they receive ₹28.20, while the Centre's share increases by a comparatively smaller ₹3.54.
MUST READ: 9 years of GST: Negative sentiment drops to near zero, businesses look to GST 2.0 reforms
GST growth expected to rebound
SBI Research expects GST revenue growth to recover after the moderation seen following the September 2025 GST rate rationalisation.
Overall GST revenue growth slowed to 5.6% in FY26, compared with 9.4% in FY25. In the first quarter of FY27, year-on-year GST growth stood at 1.5% when compared with the previous year's collections that included the compensation cess. Excluding the cess impact, growth works out to 8.4%. Going forward, SBI expects annual GST collections to expand by 8-9%.
The report also notes that states' SGST revenues have grown at an average rate of nearly 13% in the post-GST period, compared with around 8% annual growth in the taxes subsumed under GST before its introduction. According to SBI, this indicates that states continue to experience healthy revenue growth even without compensation support, making the end of the compensation cess less disruptive than critics suggest.