States across India are projected to be net gainers by approximately ₹1.43 lakh crore in FY27 compared to FY26, according to an SBI Research report released on Friday, 25 July 2025. The estimate accounts for GST collections combined with states' share in basic excise duty (BED), reflecting the structural shift in India's indirect tax architecture following the discontinuation of the compensation cess.

Revised Framework Boosts States' Combined Share

Under the new fiscal arrangement, with the compensation cess discontinued and additional excise duty (AED) introduced in its place, states' combined share from GST and BED is projected to rise to nearly ₹19.1 lakh crore in FY27, up from ₹17.7 lakh crore in FY26. The report notes that the overall size of the revenue pool has expanded, with the incremental benefits flowing toward states.

Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser at State Bank of India, said, 'There has been an increase in the overall share of the pie whose benefits will accrue to the states.'

AED Transition: A Hypothetical Loss, But Marginal

The SBI Research report modelled a hypothetical scenario to assess the impact of the AED introduction. Assuming 20 per cent growth over FY26 BED numbers and treating the entire incremental amount as AED, the figure is estimated at ₹35,874 crore.

Under the old arrangement, this amount would have been distributed as compensation cess — with states receiving 100 per cent of it. Under the new structure, states receive only 41 per cent of AED, amounting to ₹14,708 crore, implying a hypothetical shortfall of approximately ₹21,000 crore. However, the report emphasises that this loss is 'miniscule when divided among all 28 states.'

Demerit Goods Tax Hike Favours States More Than Centre

The revised tax structure on certain demerit goods — including pan and tobacco — has also shifted the revenue calculus in states' favour. Under the earlier 28 per cent GST regime, states received ₹19.74 on an intra-state supply with a taxable value of ₹100. Following the rate increase to 40 per cent on specified demerit goods, states' share rises to ₹28.20 — an additional ₹8.46 per ₹100 of taxable value, compared to just ₹3.54 accruing to the Centre. This asymmetry, the report argues, clearly demonstrates that the benefits of higher taxation on demerit goods accrue disproportionately to states.

Correcting a Common Misconception on Cess

The report also addresses a widely held misconception about the nature of the compensation cess. 'Another misnomer that needs to be corrected is that cess was never revenue of the Centre because its proceeds ultimately went to the States. That is not quite correct,' the report stated. It clarified that the cess was levied by the Union Government and recorded as a Union tax receipt before being transferred to the GST Compensation Fund in the Public Account of India, from where it was disbursed to states as grants.

GST Growth Outlook and What Comes Next

Looking ahead, the SBI Research report projects a rebound in GST collections, with annual growth expected in the range of 8–9 per cent. The recent moderation in collections is attributed to rate rationalisation, which the report characterises as on expected lines rather than a structural concern. With the new AED-based framework now in place, the focus will shift to whether states can leverage the expanded revenue pool to fund capital expenditure and social sector commitments in the coming fiscal year.