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The five-year GST compensation guarantee for states ended in June 2022. That did not end the compensation cess immediately: the cess continued to collect money for the remaining compensation account obligations and for repayment of pandemic-era borrowing transferred to states as back-to-back loans. GST Council records set March 31, 2026 as the planned end of the existing cess levy and said any surplus left after loan and interest payments would be divided equally between the Centre and the states.
The official Council material available for this explanation does not establish what arrangement, if any, operated after March 31, 2026, nor does it confirm the final account balance or a completed distribution. Those points require a later Council decision, notification, audited account or Ministry statement.
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The guarantee and the cess were not the same thing
GST began on July 1, 2017. The Constitutionally backed compensation arrangement gave states a protected revenue path for five years, ending in June 2022. It was designed to cushion states that collected less after moving to the nationwide GST system.
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1Clear out junk files and repair common Windows errors2Scan for outdated or missing drivers - takes under a minute3Repair Windows errors before they cause bigger problemsThe protected amount was not an unconditional, permanent transfer. The Ministry of Finance described the formula as revenue growing by 14% a year, compounded from each state’s 2015–16 base-year revenue. If the state’s GST-related revenue fell below that protected amount, compensation was payable from the compensation fund.
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A separate law created a compensation cess on specified goods and services. Cess receipts were credited to the compensation fund, which paid eligible compensation. Therefore, two timelines must be kept apart:
- July 2017 to June 2022: the statutory five-year guarantee of compensation for revenue shortfalls.
- After June 2022: continued cess collection to deal with unpaid obligations and borrowing connected with the guarantee, rather than a fresh five-year guarantee.
Calling the post-June 2022 levy a renewed compensation promise confuses the legal entitlement with the funding account used to settle it.
Why the cess continued after June 2022
Cess collections did not rise as quickly as the protected-revenue formula required. The COVID-19 shock then widened the gap between what states were entitled to receive under the formula and what the fund could pay from incoming cess.
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Repair common Windows errors and clear accumulated junk for a smoother, more stable PC - no reinstall needed.Free scan · no reinstallTo bridge that extraordinary shortfall, the Centre borrowed money and passed it to states as back-to-back loans. The Ministry of Finance’s April 27, 2022 status note records borrowing of ₹1.10 lakh crore in 2020–21 and ₹1.59 lakh crore in 2021–22. These amounts met part of the compensation shortfall, but they also created repayment obligations tied to the cess account.
The GST Council approved continuing the cess beyond June 2022 until the outstanding shortfall-related obligations were covered, with the extension to be reviewed. In practical terms, the levy survived the guarantee because the account still had liabilities. Money collected after June 2022 was therefore used for the account’s remaining commitments and debt servicing instead of representing a new, open-ended entitlement for future revenue losses.
What happened to the June 2022 payment
In February 2023, the Ministry of Finance announced that the Centre would release ₹16,982 crore for compensation due for June 2022 from central resources. The compensation fund had no balance for that payment, so the Centre said it would recoup the amount from future cess receipts.
The same announcement said the provisionally admissible compensation for the five-year period would thereby be cleared. That statement concerns the arrears then identified for the guarantee period; it does not create a new guarantee after June 2022 and does not by itself settle every later loan or interest obligation.
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How the borrowing-and-repayment model works
The post-guarantee arrangement can be understood as an account waterfall:
- Cess is collected on the goods and services covered by the levy.
- Receipts enter the compensation account, rather than becoming ordinary, unrestricted tax revenue.
- Outstanding obligations are serviced, including the back-to-back loans arranged during the pandemic and their interest, along with any remaining compensation-account commitments.
- Only the balance left afterward can be treated as a surplus under the GST Council’s later decision.
States received the borrowed money as loans, so the borrowing was not simply written off as a grant. Continuing cess receipts gave the system a dedicated stream with which to repay those liabilities. This is why a person seeing cess collections after June 2022 should not assume that the five-year compensation guarantee was still running.
Key dates and decisions
| Date | Event | What it means |
|---|---|---|
| July 1, 2017 | GST launched. | The five-year protected-revenue period began. |
| 2020–21 | Centre borrowed ₹1.10 lakh crore and passed it to states as back-to-back loans. | Borrowing covered part of the pandemic-era compensation shortfall. |
| 2021–22 | Centre borrowed a further ₹1.59 lakh crore on the same basis. | The compensation account acquired additional repayment obligations. |
| June 2022 | Five-year compensation guarantee ended. | The statutory protected period expired; it was not automatically renewed. |
| October 5, 2020 | 43rd GST Council meeting approved continuing the cess beyond the guarantee period until the shortfall was covered. | Cess collection could continue for account obligations after the guarantee’s expiry. |
| April 27, 2022 | Ministry of Finance published a status note explaining the formula, shortfall and borrowing. | The Ministry documented the 14% protected-growth calculation and pandemic financing. |
| February 18, 2023 | Centre announced ₹16,982 crore for the June 2022 compensation payment. | The amount was advanced from central resources and intended to be recovered from later cess receipts. |
| June 22, 2024 | 53rd GST Council meeting examined the post-March 2026 position. | The Council noted that the 2017 Act could not itself support collection after March 2026, while a different mechanism could be devised. |
| September 9, 2024 | 54th GST Council agenda recorded a projection that the back-to-back loan would be fully repaid in the later part of FY 2025–26. | This was a forecast, not confirmation of repayment on that date. |
| December 21, 2024 | 55th GST Council decision continued existing cess rates through March 31, 2026. | The decision also specified how any residual surplus would be allocated. |
What was planned for March 31, 2026
The 55th GST Council meeting continued the existing cess rates until March 31, 2026. The 53rd meeting had already recorded the legal problem: the Compensation to States Act, 2017 could not itself authorize collection beyond that date.
The Chairperson’s statement in the 53rd meeting was precise: “while post March 2026, Compensation cess could not be collected based on the Compensation to States Act, 2017, the Council had the prerogative to devise some mechanism to collect cess.” This leaves two separate questions:
- Authority under the existing law: the 2017 Act did not provide a basis for continuing the levy beyond March 2026.
- Possible future policy: the Council could consider another legal or tax mechanism, but the cited records do not record a final successor arrangement.
The 53rd meeting asked for a full account of cess receipts, repayment timing and a proposal for any replacement tax. The agenda also noted that the Group of Ministers needed more time to examine constitutional, legal and operational effects on state revenues.
How much money was involved
The GST Council Secretariat’s September 2024 status update reported net compensation-cess collections of ₹7,61,215 crore through July 2024. The same material projected cumulative collections of ₹10,27,966 crore through March 2026. The first figure was an actual reported total at that point; the second was a projection and should not be treated as a final closeout number.
| Figure | Qualification |
|---|---|
| 14% annual growth | Protected-revenue growth rate described by the Ministry of Finance in April 2022, compounded from the 2015–16 base year. |
| ₹1.10 lakh crore | Centre’s back-to-back borrowing for 2020–21, as reported by the Ministry of Finance. |
| ₹1.59 lakh crore | Centre’s back-to-back borrowing for 2021–22, as reported by the Ministry of Finance. |
| ₹16,982 crore | Central release announced in February 2023 for the June 2022 compensation payment, with recoupment planned from future cess receipts. |
| ₹7,61,215 crore | Net cess collected through July 2024, according to the 54th Council meeting agenda. |
| ₹10,27,966 crore | Projected cumulative cess through March 2026; not a final collection result. |
Who receives money after the obligations are paid
The 55th Council decision provides a specific rule for any residual balance: after the back-to-back loans and related interest are serviced, any surplus in the compensation account is to be divided 50:50 between the Centre and the states under section 10(3).
This is an allocation rule for a remaining surplus, not a promise that a surplus exists or that a particular amount will be distributed. The size and timing of any payment depend on the final receipts, interest, repayment schedule and other eligible account obligations.
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What the end means for state budgets
States lose the old revenue floor
Once the five-year guarantee ended, states no longer had the statutory assurance that GST-related revenue would be topped up to the 14% protected-growth path. Their future GST receipts depend on the ordinary GST revenue-sharing and tax-growth framework unless a later legal instrument creates another protection.
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Short-term cash flow can differ from long-term entitlement
A state may still receive money from the compensation account after June 2022 because arrears, loan proceeds or account settlements are being processed. Such a payment does not prove that the five-year guarantee remains active. It may instead be a settlement of an earlier liability.
Budget planning must distinguish estimates from receipts
States and analysts should label Council projections as estimates until collections and repayments are reported as completed. The September 2024 repayment estimate for the later part of FY 2025–26 illustrates why a forecast cannot substitute for an audited closing statement.
What the end means for the Centre and taxpayers
For the Centre, the central issue is the legal and fiscal treatment of the compensation account after the existing levy’s sunset. The Centre advanced the June 2022 amount and arranged pandemic borrowing, while later cess receipts were intended to replenish or service those obligations.
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What is not established by the available official record
The cited Council and Ministry documents do not establish:
- that a permanent successor cess or tax was adopted after March 31, 2026;
- the exact date on which every back-to-back loan and interest obligation was paid;
- the final amount collected through the sunset date;
- the existence or size of a residual surplus; or
- the date and amount of any 50:50 distribution.
The 54th meeting’s repayment estimate and the projected ₹10,27,966 crore collection are useful planning figures, but neither is proof of the final outcome. A definitive statement about the post-sunset system requires an official decision, notification, audited account or Ministry release issued after the March 2026 sunset.
Quick Recap
How to read future announcements
- Check the legal instrument. Determine whether an announcement concerns the original 2017 compensation law, a Council recommendation, a central notification or a new statute.
- Identify the purpose of the money. Separate compensation for a current revenue shortfall from repayment of old borrowing, interest or settlement of arrears.
- Check whether a number is actual or projected. Council agendas often contain estimates for future collections and repayment dates.
- Look for the closing account. A surplus distribution can be confirmed only after the obligations and interest are calculated and the final balance is reported.
- Check the coverage period. A payment relating to June 2022 or an earlier year should not be presented as a new post-guarantee entitlement.
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