The cesses on a few demerit and high-value goods meant for raising the proceeds to compensate the state governments for any shortfall in their goods and services tax (GST) revenues from protected levels for the five years to June 2022 will have to stay till FY26, the government said in Parliament on Monday.

In the last two years, the Centre had to resort to aggregate borrowings of Rs 2.69 trillion in order to make good the shortfall in the GST compensation pool. To finance these loans, the cesses will have to be continued till FY26.

The Centre has made it clear that the five-year GST compensation to states can’t be extended beyond June 30, 2022. In the latest Budget, it announced a Rs 1 trillion 50-year capex loan to states.

The Centre will compensate for the shortfall in GST receipts of the states as per statutory requirement for the initial five years after the indirect tax regime was launched in July 2017, Union minister of state for finance Pankaj Chaudhury reiterated in the Parliament.

“The Centre is committed to release full GST Compensation to the States/UTs as per GST (Compensation to States) Act, 2017 for the transition period by extending the levy of Compensation cess beyond 5 years to meet the GST revenue shortfall as well as servicing the loan borrowed through special window scheme,” Chaudhury told Lok Sabha in a written reply. Under the GST compensation mechanism, state governments are assured 14% annual revenue growth for the first five years after the tax’s July 2017 launch.

Many states, including Tamil Nadu, West Bengal and Chhattisgarh, have written to the Centre demanding that the compensation period be extended by two-five years to bolster state’s finances.