States Express Concerns Over Significant Loss in Their Share of Revenues After Proposed GST Overhaul

The Wire

9 hours ago

The states have said that the significant loss of revenue for them in the proposed GST reforms would be from the removal of items from the 28% slab to the lower rate of 18%.
New Delhi: Multiple states have expressed concerns over the substantial loss in their share of revenues that they expect to incur after the proposed overhaul of the Goods and Services Tax (GST) regime that is expected to kick in from the middle of the ongoing financial year.
The states are worried that the annual loss in revenues is likely to range between Rs 7,000-9,000 crore for most major states once the next-generation reforms come into effect.
As a result, they would have less to spend on social development and state administration given the limited powers with them to raise revenues, reported The Indian Express citing top state government officials.
'As per our assessment, revenue growth could be 8% after these GST reforms. This is going to be sharply lower than the 11.6% growth rate seen a few years ago and over 14% just before the start of GST in July 2017,' a top state government official told the newspaper.
According to a September 2019 report of the Reserve Bank of India (RBI), the weighted average GST rate fell from 14.4% at the time of inception to 11.6% in 2019, reflecting the result of a spate of tax cuts between November 2017 and December 2018.
The states have said that the significant loss of revenue for them in the proposed GST reforms would be from the removal of items from the 28% slab to the lower rate of 18%.
For most states, the top three items that account for the major portion of the GST revenue source include automobiles, construction items such as cement, along with white goods. All the three categories of these goods are going to see a cut in rate to 18% and thus, result in significant revenue loss, said officials, reported Indian Express.
'We studied over two dozen items including some white goods that had seen rate cuts earlier under GST. And we have found that customers have hardly benefited from those rate cuts in the form of significant price cuts, maybe just a reduction of Rs 1,000 or so,' said an official.
According to the GST reforms proposal, the government has proposed a broad two-slab structure, 5% and 18%, in addition to a 40% special rate for sin and demerit goods.
A few states have also expressed concerns about the proposal on additional levy in the form of excise by Centre to bridge the gap in tax incidence on tobacco when the base rate for it would be brought down to 40%. Last week, central government sources had said tobacco, as a sin good, will continue to face the same tax incidence of 88% (28% plus cess) that exists today.
'Our ballpark estimates suggest that the proposed rate rationalisation could cost the exchequer more than Rs 1.2 trillion on an annualised basis (over 0.4% of GDP). Assuming implementation from October 2025, the FY26 fiscal impact for general government finances owing to GST changes would be around 0.2% of GDP. Assuming gross loss will be shared equally by the Centre and states, this would imply gross revenue loss of around 0.1% of GDP from GST changes for the Centre, for FY26,' said Madhavi Arora, Chief Economist, Emkay Global Financial Services said in statement.
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