Punjab, which is strongly pushing for an extension of the goods and services tax (GST) compensation cess beyond March 31, 2026, was among the largest beneficiaries of the compensation payments offered to states for transition to the new indirect tax regime.
The state government received a compensation of ₹46,051 crore between the financial years 2017-18 and 2022-23 for the shortfall in its “protected revenue” from the goods and services tax collections. This amount constitutes approximately 6.9% of the total GST compensation of ₹6.64 lakh crore released by the central government to states during the period. Only four states – Maharashtra, Karnataka, Gujarat, and Tamil Nadu, in that order – received more goods and services tax compensation than Punjab, according to a written reply submitted by the finance ministry in Parliament recently.
The compensation accrued to Punjab due to its high revenue shortfall and was significantly higher than the amount released to states such as Haryana, Madhya Pradesh, Rajasthan and Telangana. An official familiar with the issue said the shortfall was primarily because the purchase tax on all commodities except cotton was subsumed in GST and the commensurate increase was not there. “The state suffered on this count as the compensation was not adequate,” he added.
Under the indirect tax regime rolled out on July 1, 2017, states were guaranteed a 14% year-on-year growth over the 2015-16 base for the first five years for taxes subsumed in the goods and services tax. The central government committed to compensating them for any shortfall during this period and sought to meet the shortfalls through the compensation cess levied on luxury and sin goods. While the compensation payments to states ended in June 2022, the levy of the cess was extended by the GST Council, headed by Union finance minister Nirmala Sitharaman, till March 31, 2026, to cover the principal amount and interest of the loan taken in 2020 and 2021 fiscal years to compensate states during the Covid-19 pandemic to meet their revenue shortfall.
However, several states, including Punjab, are now seeking further extension of the compensation cess beyond March 2026 and sharing of revenues, citing their revenue losses. Punjab finance minister Harpal Singh Cheema, during a recent meeting of the group of ministers (GoM) on GST compensation cess, made a strong push for its continuation, stating that this would help the states offset revenue loss resulting from the subsumption of various taxes into the goods and services tax.
“The continuation of the GST compensation cess regime is essential to address these financial challenges and ensure the fiscal stability of states like Punjab,” he stated. Earlier, the minister had also claimed that the subsumption of Punjab’s purchase tax into GST had led to an estimated annual revenue loss of ₹5,000 crore to ₹7,000 crore to the state. The GoM under Union minister of state for finance Pankaj Chaudhary was set up by the GST Council in September this year to decide on the future of compensation cess. It includes members from Assam, Chhattisgarh, Gujarat, Karnataka, Madhya Pradesh, Punjab, Tamil Nadu, Uttar Pradesh and West Bengal.
Punjab, which is strongly pushing for an extension of the goods and services tax (GST) compensation cess beyond March 31, 2026, was among the largest beneficiaries of the compensation payments offered to states for transition to the new indirect tax regime.
