The Union Government has clarified in Parliament that Goods and Services Tax (GST) compensation to States formally ended in June 2022, following the completion of the five-year period mandated under the Constitution, and that no further compensation is legally due thereafter.
The issue was raised in the Lok Sabha by Shri Thiru Arun Nehru, who sought details on the discontinuation of GST compensation, the financial impact on Tamil Nadu, and whether the Centre proposed any alternative relief. The response was provided by Minister of State for Finance, Shri Pankaj Chaudhary, in a written reply to Unstarred Question No. 59 to be answered on December 1, 2025.
Constitution Limited Compensation to Five Years
In his response, the Minister stated that Section 18 of the Constitution (One Hundred and First Amendment) Act, 2016 — which paved the way for the rollout of GST — clearly provided for compensation to States only for five years from the date of implementation of GST.
Accordingly, Parliament enacted the GST (Compensation to States) Act, 2017, operationalising this constitutional promise. Under this law, compensation cess was collected and distributed to ensure that States did not suffer revenue loss during the transition to the new indirect tax regime.
“GST compensation was provided to States and Union Territories for five years, that is, up to June 2022, strictly as per constitutional provisions,” the Finance Ministry said.
Revenue Loss Question ‘Does Not Arise’: Centre
The government declined to furnish any estimates regarding Tamil Nadu’s annual revenue loss following the discontinuation of compensation. It stated that once the constitutional period for compensation ended, the question of calculating losses or proposing further compensation “does not arise”.
This suggests that the Centre considers the arrangement to have concluded finally and lawfully, with no continuing fiscal obligation toward States under the GST compensation framework.
States Continue to Protest End of Compensation
The Centre’s firm stance comes amid increasing demands by several States — particularly opposition-led governments — seeking an extension or revival of GST compensation. States have argued that:
- GST collections have not stabilized as projected
- Economic slowdowns and inflation have strained revenues
- Pandemic after-effects have unevenly impacted individual States
- Compensation withdrawal disproportionately affects manufacturing States like Tamil Nadu
However, the Finance Ministry maintains that GST implementation was a cooperative federal exercise and that States agreed to the five-year compensation window when the constitutional amendment was ratified.
No Proposal for Alternative Relief Mechanism
Importantly, the government also ruled out any steps or proposals to compensate Tamil Nadu (or other States) for revenue loss following the discontinuation of compensation.
This effectively closes the door on:
- Revival of the GST Compensation Cess
- Extension of compensation beyond June 2022
- Special revenue grants for affected States
Political and Federal Implications
The issue continues to remain politically sensitive. Several States have accused the Centre of:
- Centralising fiscal control
- Reducing State-level autonomy
- Shifting fiscal burden without revenue assurances
With State elections approaching in multiple regions, GST compensation is expected to resurface as a major federal issue in political discourse.
Background: Why Compensation Was Promised
When GST replaced multiple State-level taxes in 2017, many States feared revenue loss due to:
- Uniform tax rates
- Input tax credits
- Subsuming of local levies
To secure States’ consent, the Centre promised to:
- Guarantee 14% annual revenue growth
- Make up any shortfall using compensation cess
- Limit the support period to five years
That period expired in June 2022.
