States Expected to Receive Higher Tax Revenue Even After GST Compensation Cess Ends

The conclusion of the GST Compensation Cess is unlikely to reduce the financial strength of Indian states. Instead, a fresh report by SBI Research suggests that states are on track to earn a substantial net gain of around Rs 1.43 lakh crore during the 2026 to 27 financial year.

When the Goods and Services Tax was introduced in 2017, the compensation cess was created to offset any revenue losses faced by states during the transition. Levied mainly on products such as tobacco and pan masala, the cess officially came to an end on February 1, 2026. Its withdrawal had raised concerns among several economists, who estimated that states could lose between Rs 15000 crore and Rs 20000 crore annually.

However, SBI Research has presented a different outlook in its latest Ecowrap report. According to the study, higher GST collections along with the introduction of Additional Excise Duty under the Central Excise Act will more than compensate for the discontinuation of the compensation cess.

The report estimates that the combined share of GST and excise revenue allocated to states will rise to Rs 19.1 lakh crore in FY27, compared with Rs 17.7 lakh crore in FY26. This translates into an overall increase of approximately Rs 1.43 lakh crore in state revenues.

A key factor behind this growth is the revision of GST rates on selected products. Tax on certain goods has been increased from 28 percent to 40 percent, resulting in a larger State GST share. For example, where a transaction worth Rs 100 previously generated Rs 19.74 for a state, the revised structure is expected to increase that amount to Rs 28.20.

The report also highlights the consistent growth in State GST collections since the introduction of the tax system. Over the past nine years, SGST revenue has recorded an average annual growth rate of about 13 percent, demonstrating that states are now better positioned to sustain revenue growth without relying on the compensation cess.

Overall, the findings suggest that the end of the GST Compensation Cess will not weaken state finances. Instead, rising GST collections, improved tax sharing arrangements and additional excise revenue are expected to strengthen state treasuries and deliver higher revenues in the coming financial year.