GST revamp again sparks concern around fiscal autonomy for states

Several states have voiced apprehension over the potential erosion of their revenues following the Centre’s proposed overhaul of the Goods and Services Tax (GST) regime, which is expected to take effect from the middle of the current financial year.

Officials from major states estimate that the changes could result in an annual revenue loss of between Rs 7,000 crore and Rs 9,000 crore each, leaving them with fewer resources for social development and administrative spending, a report in The Wire said. With limited powers to raise their own revenues, states argue that GST remains their most critical source of funds.

A senior state government official told the Indian Express that revenue growth after the reforms is projected at about 8 per cent, a sharp decline from the 11.6 per cent growth recorded a few years ago — and it used to be over 14 per cent before GST was introduced in July 2017. The fall, they argue, stems mainly from the removal of several high-yield goods from the 28 per cent slab to the lower 18 per cent rate.

Automobiles, cement and other construction inputs, along with white goods, are among the top contributors to state GST revenues. With all three categories set to shift to the 18 per cent slab, officials expect a significant hit to collections.

Some have further noted that earlier rate cuts on white goods offered only marginal benefits to consumers, with price reductions often limited to a few thousand rupees.

Now, the Centre has proposed a simplified two-rate structure of 5 per cent and 18 per cent, with a special 40 per cent rate reserved for sin and demerit goods. While it has put out assurances that the overall tax incidence on tobacco will remain unchanged at 88 per cent (through an additional excise levy), states remain sceptical about the broader fiscal implications.

Estimates by Emkay Global Financial Services suggest that the reforms could cost the exchequer over Rs 1.2 trillion annually — equivalent to about 0.4 per cent of GDP — with the Centre and states sharing the loss equally. For the states, this would amount to around 0.1 per cent of GDP in FY26 alone.

Karnataka revenue minister Krishna Byre Gowda, a member of the Group of Ministers on rate rationalisation, said the impact on states’ finances needs to be thoroughly assessed. “GST is the biggest source for the states. So, any major shock in GST will fundamentally affect their fiscal health. We would like rationalisation to be carried out along with protections for state revenues,” he told The Hindu.

He added that the Centre had developed the proposals outside the GST Council’s consultation framework, leaving states unclear about any compensatory measures. He also argued that the Finance Commission has so far declined to recognise the fiscal stress caused by GST’s structural shift from an origin-based to a destination-based tax, leaving states without an effective redressal mechanism.

“As things stand, the GST Council confines itself to tax matters, while the Finance Commission treats the fiscal impact on states as extraneous. If these concerns are not addressed, some states will be left at a serious disadvantage. For the sake of federal unity, these issues cannot be brushed aside,” Gowda said.

Union finance minister Nirmala Sitharaman is scheduled to meet the Group of Ministers on rate rationalisation on 20 August, Wednesday, where states are expected to press for revenue safeguards alongside the proposed reforms.