Opposition states oppose GST rate rationalisation, warn of revenue loss of up to Rs 2 lakh crore

Eight states- Karnataka, Tamil Nadu, Telangana, Kerala, West Bengal, Himachal Pradesh, Jharkhand and Punjab- have raised objections to the Centre’s proposal for Goods and Services Tax (GST) rate rationalisation, warning that it could severely undermine their fiscal stability unless accompanied by a robust compensation framework.

“Independent estimates suggest the Centre’s proposal could result in losses ranging between Rs 85,000 crore and Rs 2 lakh crore annually”, a joint statement said after a meeting of finance ministers of opposition-governed states held in Delhi on August 29.

In a joint submission, the opposition-governed states said that while they support the principle of simplifying the GST rate structure, any move to reduce slabs and shift items into lower tax brackets must not come at the expense of state revenues.

They pointed out that successive rounds of rationalisation since GST was introduced in 2017 had already reduced the effective GST rate from 14.4 percent in FY18 to 11.6 percent in FY24, with collections as a share of GDP still below pre-GST levels. The latest plan, they cautioned, could push the effective rate below 10 percent, creating the risk of a substantial revenue shock.

The states stressed that GST constitutes nearly half of their total tax collections, unlike the Centre which has access to direct taxes, dividends, customs and cesses.

According to the states, the impact could translate into a 15 to 20 percent fall in their current GST revenues, over and above the discontinuation of the compensation cess that ended in 2022. Without safeguards, such a decline, they warned, would force them to drastically curtail developmental expenditure.

They also raised concerns over the treatment of sin and luxury goods, which presently contribute about 7 to 8 percent of GST collections through cesses. "For example, pan masala currently attracts an effective tax incidence of nearly 88 percent, but the new proposal could bring this down to 40 percent unless an additional levy is introduced. While the Centre has claimed that the overall tax incidence will remain unchanged, the states said there is no clarity on how the balance will be collected or shared, raising the risk of a significant shortfall in their revenues", it said.

The states urged that any rationalisation must be accompanied by a revenue protection mechanism that ensures full compensation for losses over a minimum of five years. They recommended using FY 2024–25 as the base year for computing compensation and argued that the guaranteed protection should assume a 14 percent annual growth rate, in line with earlier precedents. They also suggested imposing an additional levy on sin and luxury goods, with all proceeds devolved to states, and called on the Centre to raise loans against future cess receipts if required, as was done during the pandemic.

The states said the GST framework was built on consensus and cooperative federalism, and reforms to simplify and rationalise the structure should not be pursued at the cost of state finances. They warned that implementing the Centre’s plan without adequate safeguards would cause “severe damage to state revenues and widen fiscal imbalances.” The matter is expected to come up for discussion at the next meeting of the GST Council, where the Centre and states will negotiate the future course of India’s indirect tax regime.