GST reforms: Why consensus depends on Centre compensating states

Politics Politics of India

Posted by AI on 2025-09-02 12:07:50 | Last Updated by AI on 2026-06-26 02:31:49

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The sharpest point of contention will not be the Prime Ministers Diwali deadline for next generation reforms but the question of how states will be compensated for the sweeping changes proposed.

Narendra Modis government is keen to make Goods and Services Tax (GST) reform a priority, aiming to transform the regime into a next-generation system by Diwali. However, the Centre and the states will need to arrive at a compromise on the question of compensation, with some states pushing for higher assured sums to be paid for any revenue loss from an overhaul of the tax structure.

Leaders of several states, especially those ruled by non-BJP parties, are expected to demand higher compensation during the two-day long GST Council meeting starting tomorrow, August 27. They are expected to demand the Centre to multiply the nominal sum of Rs. 1.5 lakh crore that has been allocated for compensation in the budget by a factor of at least two to insure against potential losses from an overhaul.

Currently, the GST compensation mechanism guarantees that states will be compensated for any loss of revenue for five years since the implementation of the tax, which began in 2017. However, this protection is set to end in 2022. The Centre is against multiplying the amount as the tax buoyancy is expected to improve.

The Centre is likely to suggest a mechanism where the compensation fund is normalized every year according to a fixed formula, factoring in things like tax buoyancy, GDP growth, and revenue growth of the states. This would be a more structured and equitable approach as compared to the flat doubling of the compensation amount.

States are also likely to push for an extension of the five-year compensation period, with some requesting an additional five years, taking the total to 15 years. The Centre is likely to resist the plea for an extension, pointing to the improving tax buoyancy of the GST system, and might be open to a partial extension of a maximum of two years.

The outcome of the GST Council meeting is likely to be closely watched as an indicator of the fate of cooperative federalism under the BJP government, and whether a consensus on such a significant point can be reached between the Centre and the states.

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