**Executive Summary**
This document addresses Lok Sabha Unstarred Question No. 2400 regarding special grants to Karnataka, answered on December 15th, 2025. It outlines the recommendations regarding the GST Compensation Cess, Fifteenth Finance Commission's special grants, and the recovery of the IGST shortfall from Karnataka. The document references decisions made in GST Council and GST Implementation Committee (GIC) meetings, highlighting actions taken in September 2025 and April 2025.
**Key Points / Main Content**
* **GST Compensation Cess Recommendations:**
* Group of Ministers (GoM) recommendations submitted to GST Council.
* GST Compensation Cess continues on all goods except pan masala, gutkha, cigarettes, chewing tobacco products like zarda, unmanufactured tobacco, and bidi, implemented since September 22nd, 2025.
* Items other than the tobacco products mentioned above will continue at the existing rates of GST and compensation cess where applicable, till loan and interest payment obligations under the compensation cess account are completely discharged.
* No specific study has been conducted on the State-wise implications.
* **Fifteenth Finance Commission Grants:**
* The Commission may be requested to reconsider the recommendation as it introduces a new principle.
* Due consideration will be given to the recommendation, keeping in view the untied resources with the State Governments and the fiscal commitments of the Central Government.
* **Recovery of IGST Shortfall:**
* The recovery of the shortfall in IGST was deliberated in the 55th Meeting of the GST Council.
* Cumulative recoveries for FY 2023-24 & FY 2024-25 were initially planned for March 2025.
* Following States' concerns, the GST Implementation Committee (GIC) decided to defer the recovery.
* The consolidated recovery for FY 2023-24 & FY 2024-25 was carried out in April 2025, following the approval of the GST Council and GIC.
**Impact Analysis**
**Karnataka**
* **Impact:** Karnataka is impacted by the GST Compensation Cess framework, the Fifteenth Finance Commission's grants decision, and the recovery of IGST shortfall.
* **Action Required:** Monitor and assess the impact of GST Compensation Cess on revenue, engage with the Central Government regarding the Fifteenth Finance Commission's recommendations, and manage fiscal planning considering the IGST shortfall recovery in April 2025.
**State Governments**
* **Impact:**
* The GST Compensation Cess framework and the deferred IGST recovery have implications for all states
* **Action Required:**
* Consider fiscal planning, as the recoveries made in the month of March, 2025 should not be carried out at the end of the FY as it may adversely impact the fiscal situation of the States.
Key Entities Referenced
GST Council: A council responsible for making recommendations related to Goods and Services Tax (GST) in India.
Fifteenth Finance Commission: A commission that makes recommendations on the distribution of tax revenues between the Union and the States.
Karnataka: The State for which special grants and GST compensations are under discussion.
GST Compensation Cess: A cess levied on certain goods and services to compensate states for revenue losses arising from the implementation of GST.
Group of Ministers (GoM): A group of ministers formed to provide recommendations on GST related matters.
GOVERNMENT OF INDIA
MINISTRY OF FINANCE
DEPARTMENT OF REVENUE
LOK SABHA UNSTARRED QUESTION NO. 2400
TO BE ANSWERED ON MONDAY, THE 15TH DECEMBER, 2025/ 24 AGRAHAYANA, 1947 (SAKA)
Special Grants to Karnataka
2400 SHRI E TUKARAM:
Will the Minister of FINANCE be pleased to state:
(a) whether the Group of Ministers (GoM) has submitted its final recommendations regarding the
future of the GST Compensation Cess and if so, the details of the proposed framework along
with its likely implications for the State of Karnataka and if not, the reasons for the continued
delay in finalising the same;
(b) whether the Government has accepted the Fifteenth Finance Commission’s recommended
Special Grant of Rs. 5,495 crore and the State-specific Grant of Rs. 6,000 crore for Karnataka,
if so, the details of the amount released so far, and if not, the reasons therefor; and
(c) whether the recovery of the IGST shortfall from Karnataka was to be deferred until the
submission of the Committee of Officers final report, if so, the details thereof and if not, the
rules or provisions invoked to justify the early recovery and the resultant financial impact on
Karnataka to date?
ANSWER
THE MINISTER OF STATE IN MINISTRY OF FINANCE
(SHRI PANKAJ CHAUDHARY)
(a) :- Group of Ministers (GoM) has submitted its recommendations to GST Council. As per
recommendations of the GST Council in its 56th meeting held on 03rd September 2025, the GST
Compensation cess on all goods except pan masala, gutkha, cigarettes, chewing tobacco
products like zarda, unmanufactured tobacco and bidi, has been implemented with effect from
22nd September 2025. Items other than the tobacco products mentioned above will continue at
the existing rates of GST and compensation cess where applicable, till loan and interest payment
obligations under the compensation cess account are completely discharged. No specific study
has been conducted on the State-wise implications.(b) :- (i) Explanatory memorandum as to the action taken on the recommendations made by the
Fifteenth Finance Commission in its report for financial year 2020-21 submitted to the President
on December 5, 2019, relating to Special Grants, states that “The Commission may be requested
to reconsider the recommendation as it introduces a new principle”.
(ii) Explanatory memorandum as to the action taken on the recommendations made by the
Fifteenth Finance Commission in its Final Report submitted to the President on November 9,
2020, relating to State Specific Grants, states that “Keeping in view the untied resources with the
State Governments and the fiscal commitments of the Central Government, due consideration
will be given to the above recommendation”.
(c) :- The issue of recovery of shortfall in IGST was deliberated in the 55th Meeting of the GST
Council and it was decided that cumulative recoveries for FY 2023-24 and FY 2024-25 shall be
made in March, 2025 in the base year ratio. Subsequently, various States had raised concerns
that such recoveries made in the month of March, 2025 should not be carried out at the end of
the FY as it may adversely impact the fiscal situation of the States. The issue was placed before
the GST Implementation Committee (GIC), which, in its meeting held on 27.03.2025, decided that
the request of the States regarding deferring the recovery of IGST deficit may be considered and
the consolidated recovery for FY 2023-24 & FY 2024-25 shall be carried out in April, 2025.
Accordingly, the said recovery has been made in the month of April, 2025 in accordance with the
approvals of the GST Council and GIC.
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