Revenue concerns mount for states as GST complexity continues

The recent Goods and Services Tax (GST) reforms approved by the GST Council have drawn sharp criticism from several state governments and policy analysts, with concerns mounting over revenue losses, structural complexities, and potential threats to fiscal federalism.

Under the 2025 reform, the GST slabs have been rationalised from the four rates of 5, 12, 18, and 28 per cent to primarily just two main rates, 5 per cent and 18 per cent, alongside a high 40 per cent rate for select sin and luxury goods. While the move is aimed at easing compliance and reducing tax burdens on essential items, critics argue it leaves underlying issues unresolved.

Complexity persists despite fewer slabs

Analysts have highlighted that the high 40 per cent rate on products such as tobacco, pan masala, sugary drinks, and luxury cars maintains significant complexity and taxation disparity.

Disputes over the classification of various goods particularly food items and beverages as goods or services continue to create litigation risks and compliance challenges.

“While simplification is the stated goal, classification disputes and the uneven taxation of certain categories mean businesses and consumers will still face confusion,” said an industry observer.

Revenue losses to states a serious concern

State governments have expressed alarm over potential revenue shortfalls. Kerala finance minister K.N. Balagopal estimated the state could lose between Rs 8,000 crore and Rs 10,000 crore annually due to the rate cuts, including Rs 2,500 crore from sectors such as cement, electronics, automobiles, and insurance.

States fear these losses could affect funding for welfare schemes and infrastructure projects. Although the Centre has argued that reduced rates may boost consumption and offset some revenue shortfalls, critics maintain that short-term fiscal pressures could constrain state budgets and public services, threatening the cooperative federalism model underpinning the GST framework.

Uneven impact on consumers and industries

While rate reductions benefit middle-class households by lowering taxes on essential and aspirational goods such as air conditioners, washing machines, and insurance premiums, the high 40 per cent tax on sin goods has drawn criticism for creating economic distortions. Analysts warn that such uneven taxation could encourage evasion and distort market behaviour in heavily taxed sectors.

Union Finance Minister Nirmala Sitharaman defended the reforms, noting that all decisions at the GST Council were taken unanimously, with no objections from any state. Revenue Secretary Arvind Shrivastava added that the financial impact of the rate rationalisation, estimated at Rs 48,000 crore, would remain fiscally sustainable for both the Centre and the states.

Proponents argue that lower tax rates will stimulate consumption, potentially offsetting the revenue loss. “When the middle class saves 18 per cent on health and life insurance, that money is likely to be spent on other taxable goods, which can compensate for the reduction in rates,” said an economist familiar with GST policy.

Why the criticism matters

GST is India’s largest indirect tax reform, affecting the economy, businesses, government revenues, and consumer pricing. Experts warn that half-measures or incomplete reforms risk undermining economic stability and trust in the system.

Reduced state revenues could hamper regional development, widen socio-economic inequalities, and challenge the fiscal autonomy of states.

Moreover, the persistence of classification disputes, inverted duty structures, and uneven tax incidence across sectors suggests that the reform, while politically and publicly popular, does not fully address GST’s structural challenges.

Observers stress that India’s economic momentum depends on stable tax policies, and uncertainty over revenue flows could slow down investment and consumption.