Even as states have shown support to the Centre’s proposal to rationalise rates of goods and services tax (GST), concerns over revenue losses are becoming apparent for several of them. The meeting of the GST Council on September 3 and 4 is likely to see fresh calls for compensation to help states’ tide over potential revenue losses.
One of the options before the Council is to levy an additional duty over the 40% rate on sin and luxury items. This would not only keep the tax incidence on these items at the current level but would also result in some additional revenue.
The Centre’s proposal to have two main rates of GST of 5% and 18% along with a 40% rate while scrapping the 12% and 28% rate is seen to have a revenue implication of about Rs 50,000 crore this fiscal and analysts say it could lead to losses of a little over Rs 1 lakh crore in a full fiscal year. Exemption of life and health insurance policies for individuals is seen to lead to a revenue loss of Rs 9,700 crore.
The expectation is that some of this would be offset by higher sales that would lead to more revenue collections but several states are worried about the short term impact of the move, especially at a time when they are also awaiting the report of the Sixteenth Finance Commission on the sharing of tax revenue between the Centre and the States from April 1, 2026 to March 31, 2031.
In recent days, states including Karnataka, Kerala, Tamil Nadu, West Bengal and Punjab have pointed out the revenue implications of the rate rationalisation of GST even though they have largely supported the move that will benefit common people.
Karnataka’s revenue minister Krishna Byre Gowda is reported to have said that states had expressed concerns at the meeting of the Group of ministers of the GST Council on rate rationalisation, estimating cumulative losses at anywhere between Rs 85,000 crore to Rs 2 lakh crore. Kerala finance minister KN Balagopal has also estimated that the state’s revenues could face a dip of Rs 8,000 crore to Rs 9,000 crore annually.
Following the meeting of the GoM, both Punjab and West Bengal had also voiced concerns over losses on revenue from the GST rate rationalisation.
A report by Ambit Capital noted that the annual revenue loss could range from around Rs 70,000 crore to Rs 1.8 lakh crore. However, the revenue impact on states will be much higher than the Centre, it said, pointing out that states would ultimately bear two-thirds of the revenue losses due to lower rates.
The estimated revenue loss would be a shared burden. “While states will directly lose a portion of their GST revenue, they stand to lose more indirectly. This is because the overall fall in GST revenues will reduce the Centre’s gross tax revenues, of which about 33% is budgeted to be transferred to states,” it said.
