Primarily, the authors in the aforesaid article have argued that the compensation cess levied on products such as tobacco, which was earlier transferred entirely to the states, has now been reclassified as an Additional Excise Duty (AED) and sub sumed within the Basic Excise Duty (BED). Since BED forms part of the divisible pool and is shared between the Centre and states according to the Finance Commission's devolution formula, it is argued that states would lose the exclusive benefit they previously enjoyed from the compensation cess. 

Our estimates indicate that after accounting for GST collections together with States' share in Basic Excise Duty, States are expected to be net gainers by approximately ?1.43 lakh crore in FY27 compared with FY26. Under the revised frame work, with the Compensation Cess discontinued and Additional Excise Duty introduced, States' combined share from GST and Basic Excise Duty is projected to increase to nearly ?19.1 lakh crore in FY27 from Rs 17.7 lakh crore in FY26. There has been an increase in the overall share of the pie whose benefits will accrue to the states. 

With the introduction of AED in Basic Excise Duty (BED) , in FY27, we have created a hypothetical scenario in which by assuming 20% growth over FY26 BED numbers, and assuming that this entire amount is AED , it is estimated at Rs 35,874 crore. While, under the old arrangement in FY26, this AED would have been given as compensation cess, and hence states receive 100% of it (i.e., Rs 35,874 crore). However, in the new arrangement, states receive 41% of AED which is Rs 14,708 crore. This leads to a hypothetical loss of ~Rs 21,000 crore in FY27. This amount is miniscule when divided among all 28 states. 

Additionally, the impact of the revised tax structure from 28% to 40% on certain commodities such as pan and tobacco indicate that for an intra-State supply with a taxable value of ?100, States earlier received ?19.74 under the 28% GST regime Following the increase in GST on specified demerit goods from 28% to 40%, the States' share rises to ?28.20. Thus, the revised structure results in an additional ?8.46 accruing to States compared with ?3.54 for the Centre, clearly indicating that the benefits of higher taxation accrue to States as well. 

The Compensation Cess was never intended to constitute a permanent source of revenue for States. It was introduced under the GST (Compensation to States) Act, 2017 as a transitional arrangement pursuant to the constitutional guarantee under which assured States compensation for any revenue loss arising from the implementation of GST. According to GST Council data on taxes subsumed under GST, States recorded an average annual growth of only around 8% in revenues from the taxes subsumed under GST during the pre-GST period, whereas SGST revenues have grown by nearly 13% on average during the post-GST period. Even after the withdrawal of the Compensation Cess, States' GST revenues are projected to grow by around 7% in FY27 over FY26, indicating that States continue to experience healthy revenue growth even without compensation support. The Compensation Cess has fulfilled its intended role as a temporary transition mechanism.

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 cess was levied by the Union Government and appeared as a Union tax receipt subsequently transferred to GST Compensation Fund in the Public Account of India, which finally went to states as grants.