Eastern states face sharper fiscal adjustments as GST rationalisation looms

Bihar, Assam and West Bengal will likely face a tighter squeeze in their finances once the goods and services tax (GST) rate rationalisation, announced by Prime Minister Narendra Modi in his Independence Day address takes effect, as these states derive a larger share of revenue from the indirect tax regime.

A Moneycontrol analysis shows that GST accounted for 61.7 percent of Bihar’s tax revenue in FY25, 50.1 percent for Assam and 46.2 percent for West Bengal, well above the national average of 43.2 percent.

While the Centre’s estimated net revenue hit from the GST rate cuts is expected to be less than 0.15 percent of the GDP, the impact on states could be disproportionately larger, Emkay Research has said.

States not only rely heavily on state GST (SGST) as part of their tax revenue but also on their share of central GST collections through devolution.

“States’ effective losses due to GST changes could even hit ~0.3 percent of GDP on an annualised basis,” Madhavi Arora, chief economist at Emkay Global Financial Services, said in a note. The new structure is expected to take effect from October.
Among smaller states, dependence is even more pronounced. Northeastern states such as Mizoram (80.4 percent), Arunachal Pradesh (74.5 percent) and Manipur (72.4 percent) derive more than two-thirds of their tax revenues from GST. Tripura (55.7 percent) and Sikkim (55.3 percent) also sit well above the national average.

Arora cautioned that the fallout is most likely to hit capital expenditure, which was already being squeezed by sticky revenue spending and the rising burden of subsidies and welfare schemes. “…revenue loss from the GST rate rationalisation (and lower tax devolution from the Centre) will put further pressure on their already-constrained fiscal position. With revex turning increasingly sticky, states may be compelled to cut capex to keep their fiscal position under control,” she said.

On the other end of the spectrum, some southern states are better placed, with less than two-fifths of their tax revenues coming from SGST. In Telangana, for instance, just over a third of FY25 revenues came from SGST, while Andhra Pradesh and Tamil Nadu were 37 percent dependent on the levy.

Uttar Pradesh and Madhya Pradesh may also be more shielded than others, as their collection share was less than the national average.

Speaking from the Red Fort on August 15, Modi said the GST overhaul include a major reduction in tax rates, describing the proposed changes as a “Diwali gift” aimed at easing citizens’ tax burden.

“This Diwali, I am going to make it a double Diwali for you. Over the past eight years, we have undertaken a major reform in GST. Now, we are bringing next-generation GST reforms. This will reduce the tax burden across the country,” Modi said.

The three groups of ministers (GoMs) set up by the GST Council will meet on August 20 and 21 to review the revised framework proposed by the Centre, including proposals to rationalise the tax structure.

The proposed revised structure plans to do away with the 12 percent and 28 percent slabs, while retaining the 5 percent and 18 percent rates. The highest GST rate will remain at 40 percent for the so-called sin goods.