When GST launched in 2017, states surrendered much of their independent taxation power in exchange for a five-year guarantee: the Centre would compensate any revenue shortfall, via a dedicated cess, until June 2022.

That guarantee duly expired on 30 June 2022. But many states still faced shortfalls — worsened by the pandemic — and the Centre had already borrowed and released ₹1.1 lakh crore (2020-21) and ₹1.59 lakh crore (2021-22) as back-to-back loans to part-cover the gap.

From guarantee to loan

The compensation cess didn’t end in 2022 — it was extended to March 2026, but now to repay those loans rather than to compensate states. In effect, the assured-compensation model gave way to a debt-repayment one, leaving several states arguing they were short-changed.

Many states have since pressed to extend compensation, citing strained finances. The dispute is fundamentally about fiscal federalism: whether states that pooled their tax sovereignty are kept whole.

What trust requires

A durable fix is predictable, rules-based revenue sharing the states can plan around — so the next big reform doesn’t depend on goodwill that expires on a deadline.