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.