States’ GST challenge When GST was launched manufacturing States had expressed concerns about its adverse revenue implications. The Centre then assured to protect States against any revenue loss during an initial period of five years post implementation of GST.

The formula for compensating States factored a compounded growth rate of 14 per cent on the respective base line revenue of States in 2015-16. There was a dip in revenues during the pandemic for some States which eventually increased the compensation due to them.

Despite the Centre’s constraints, it cleared the dues through borrowings subsequently. In February 2023, the Centre cleared provisional dues by disbursing about Rs.16,982 crore to States.

Compensation cess has been extended till March 2026 to enable the Centre to recoup the amount disbursed to States through union exchequer. However, States will not get any share from the proceeds of the extended levy and are no longer have assured revenue protection.

States are constrained in raising revenue as decisions on tax rates are taken by the GST Council.