Opposition states warn of revenue hit from GST revamp, demand compensation

A group of Opposition-governed states on Friday expressed serious concerns over the Centre’s proposed restructuring of the Goods and Services Tax (GST) regime, warning it could result in a potential revenue shortfall of between Rs 1.5 lakh crore and Rs 2 lakh crore. They also called for a clear compensation mechanism to offset the anticipated losses.

Finance ministers and representatives from eight states — Himachal Pradesh, Jharkhand, Karnataka, Kerala, Punjab, Tamil Nadu, Telangana, and West Bengal — convened to discuss their unified stance on the issue. They announced plans to present their joint proposal during the upcoming GST Council meeting scheduled for 3 and 4 September.

Their suggestion to preserve revenue neutrality while pursuing rate rationalisation includes an additional levy on sin and luxury items, supplementing the proposed 40 per cent tax rate. The funds generated through this surcharge, the states asserted, should be shared among them to cushion the blow of reduced collections.

Karnataka finance minister Krishna Byre Gowda, speaking to the media after the meeting, estimated that each participating state could see a decline of 15 to 20 per cent in their current GST income.

"The 20 per cent GST revenue loss will seriously destabilise the fiscal structure of state governments across the country," Byre Gowda said. He further stressed that states should be compensated for 5 years till the revenues stabilise.

Byre Gowda explained that when the GST system was launched, the revenue-neutral rate (RNR) was pegged at 14.4 per cent. However, with previous rounds of rate rationalisation, the effective tax rate has dropped to around 11 per cent. The Centre’s latest proposal could reduce it further to 10 per cent.

"States' revenue interest should be protected. If there is a serious loss to state government revenues, people will be impacted, development work will be impacted and insufficient revenue will hurt state autonomy as well," he said.

The Central government has floated a plan to simplify the current GST structure, which features four main tax slabs — 5, 12, 18, and 28 per cent — plus an additional compensation cess. Under the new proposal, only two primary rates, 5 and 18 per cent, would be retained. A higher 40 per cent tax rate is suggested for a limited list of goods classified as "sin" or ultra-luxury.

Himachal Pradesh technical education minister Rajesh Dharmani said, "We agree to the proposal of rate rationalisation, but we should be compensated as well."

Meanwhile, Punjab finance minister Harpal Singh Cheema urged that anti-profiteering measures also be established, noting, "A mechanism to be set up to detect profiteering so that the benefits of rate rationalisation reach the common man."

The group of states also pushed for 2024–25 to be used as the base year for determining revenue protection eligibility. In their joint proposal, they added that if revenue gaps persist despite the proposed additional duties, "the Union government should raise loans secured against the future receipts of the additional levy".

With PTI inputs