GST Compensation: Centre Clears Most Dues, New System Likely
The GST compensation dues saga may be nearing closure. As per reports from official sources, the Central Government has settled pending compensation for all states—except for two where the figures are yet to be verified. Simultaneously, a new mechanism for compensation payout is being reviewed to avoid future delays.
What Is GST Compensation?
When GST was implemented in 2017, the Centre assured states that their revenue would grow by 14% per year for 5 years. To cover any shortfall, the GST Compensation Cess was introduced under Section 18 of the Constitution (One Hundred and First Amendment) Act, 2016, and Section 7 of the GST (Compensation to States) Act, 2017.
States receive this compensation from the proceeds of this cess, which is levied on items like tobacco, luxury cars, coal, aerated drinks, etc.
Key Highlights of the Latest Development
- All dues paid: As of July 2025, compensation dues for all states except two have been cleared by the Centre.
- Two exceptions: The amounts claimed by these two states are under reconciliation. Names were not officially disclosed.
- Revised payout method: Centre is reviewing a new system for timely and automated disbursal, potentially using GSTN infrastructure.
- Cess continuation: Although the original 5-year period ended in June 2022, the cess collection continues till March 2026 to repay past borrowings.
Why Does It Matter for Businesses?
Even though this may seem like a Centre–State finance issue, it impacts taxpayers indirectly:
- Compensation cess remains in play: You’ll continue paying cess on select goods until at least FY 2025–26.
- No input tax credit (ITC) on cess for regular output tax.
- Possible compliance tightening as states will push for audit accuracy due to past mismatch issues.
Legal Reference:
- GST (Compensation to States) Act, 2017
- 52nd GST Council Meeting Minutes (2023): Extended compensation cess collection till March 2026
- Union Budget 2023–24: ₹1.06 lakh crore compensation payout shown under revised estimates
Expert Insight from Efiletax
“States that delay reconciliation may face funding uncertainty. Businesses in those states should prepare for stricter revenue collection enforcement in the coming quarters.”
— Tax Research Wing, Efiletax
What to Expect from the New Compensation Mechanism?
The Finance Ministry is reportedly exploring a data-linked, quarterly disbursal model. This would tie state GST revenue shortfalls directly to verified GSTN reports, thus:
- Reducing manual claims
- Avoiding political friction
- Ensuring transparency and audit trail
A final decision may emerge in the next GST Council meeting.
FAQs
Q1. Will compensation cess be removed soon?
No. As per GST Council decisions and Budget estimates, it continues till March 2026.
Q2. Why are two states’ dues still pending?
Due to discrepancies in claim data. The Centre is waiting for verified figures before releasing funds.
Q3. Does GST compensation affect my business?
Yes, indirectly. If cess continues longer, it can affect product pricing and input tax structures.
Summary
The Centre has cleared GST compensation dues for all states except two pending verification. A new system is under review to streamline payouts and prevent delays. Cess will continue till March 2026, affecting businesses dealing in luxury and sin goods.
Need help with GST compliance or cess calculation?
Let Efiletax simplify your filing, audits, and compliance needs.