Q.1)The GST compensation cess was proposed in order to help states to recover their revenue losses due to implementation of GST. Critically analyze with respect to recent Centre-state dispute on compensation cess.

Why this question:

GST Compensation Cess has been a point of concern in the evolving Centre- state relations.

Key demand of the question:

Importance of GST compensation cess and issues associated with it and measures to resolve it.


Critically analyze- The key to tackling this question is providing ample evidence to support the claims. Ensure that the analysis is balanced by shedding light on, and presenting a critique of, and alternative perspectives. Present extensive evidence taken from a varying range of sources.


Give a brief introduction about the GST compensation cess, why it was formed and its duration.


In the first part, mention the need for the cess and the impact it would create.

In the next part, talk about the increasing dispute between Centre and state for the cess, reasons for the dispute- late compensation, insufficient amount, etc. and the stands of Centre as well as state.


Conclude with a way forward for the resolution of the dispute.

Model Answer

The GST came into force on 1st July 2017 after the enactment of the 101st Constitution Amendment Act, 2016. With this, a large number of central and state indirect taxes merged into a single tax. 

As per the GST Act, states are guaranteed compensation for any revenue shortfall below 14% growth (base year 2015-16) for the first five years ending 2022. GST compensation is paid out of Compensation Cess every two months by the Centre to states. 

However, it has been reported that the Centre has failed to make payments to the states on time in anticipation of the shortfall in collections and the resultant impact on the government’s fiscal deficit. This has resulted in a rising dispute over the cess between the Centre and the states. The Union Finance Minister in a recently held 41st GST Council meeting asserted that the Centre will not be able to compensate the States. The Central Government is asserting that GST collections have sharply come down this year due to the Covid-19 pandemic. The GST compensation requirement is estimated to be around Rs 3 lakh crore this year, while the cess collection is expected to be around Rs 65,000 crore. Thus there is an estimated compensation shortfall of Rs 2.35 lakh crore. 

The failure of Centre to deliver the GST compensation to states is mainly on the account of economic slowdown that the country has been going through and mostly owing to the crisis created by the pandemic. But the compensation is very important for the states as they no longer possess taxation rights after most taxes, barring those on petroleum, alcohol, and stamp duty were subsumed under GST. Therefore the Centre came up with alternatives for states viz. borrowing either under a special RBI window or from the market under different terms. However, a few states have raised concern over this. Hence, it is very important for the Centre to take steps to reach a consensus as soon as possible.